HSA: What is it and why is it cool?

Health Savings Accounts seem to be getting more attention these days. And it’s not by accident. Multiple studies (here, here, and here) have suggested that you’ll need more than $175,000 just to cover those in retirement.

Enter: The HSA

Health Savings Accounts are available in tandem with a High Deductible Health Plan. These accounts are NOT “use it or lose it” — in fact, the balance continues to grow and rollover each year if unused for medical expenses. Employers and employees are allowed to contribute to the account. And, most importantly, investments are permitted inside the account if you want to invest the balance for the future.

When an employer elects to allow investments in the plan, this shouldn’t be a checkbox yes/no decision. They’ll need to look at the behavior of the participants. Are their employees who maintain a balance in the HSA from year to year (or have the means to do so), or do they use it as a debit card and spend it down to zero each year? Should two HSA providers be permitted — one with investments targeted to those with a balance, and one without targeted to those that spend it down? The investments that are allowed in the account should be monitored on an ongoing bases just like your retirement plan, and they should be chosen with the employees and their risk tolerance in mind. This is money they might need before retirement, so it strikes a fine balance between long term and short term investments.

Your 401k or 403b is for retirement, your HSA is for retirement healthcare. The biggest difference between the two is that the HSA is TRIPLE TAX FREE: contributions on the way in are pretax, they grow tax free, and if used for medical expenses are also tax free on distribution. If not used for medical expenses, Medicare premiums, or long term care in retirement, there are provisions for taking withdrawals and paying taxes on the earnings, much like a Traditional IRA. This makes a very nice sidecar to a person’s retirement plan.

If you’re looking for a way to help your employees another way for retirement, consider offering a health plan with an HSA.