Surveys show rising health care costs affect retirement savings—HSAs are a solution

Like many Americans, Gavin Smith’s employer is offering only a high deductible health plan (HDHP) next year. Having two active sons and knowing the HDHP has higher out-of-pocket amounts, he is worried about having enough money to pay the medical bills. Gavin decides to reduce the amount he saves for retirement to help free up more money for health care costs.

A recent survey by Employee Benefits Research Institute (EBRI)/Greenwald & Associates shows that Gavin is not the only worker making a choice like this. Some workers are sacrificing their retirement security to meet their potential medical expense obligations. Unfortunately, this only shifts the financial burden from health care to retirement readiness.

While HDHP enrollment continues to grow, some workers and employers may not realize how health savings accounts—a component of HDHPs—can reduce their financial concern. Workers save money using tax-free HSA distributions for qualified medical expenses. And similar to retirement plans, many employers help fund their workers’ HSAs to encourage HDHP enrollment, which is a cost savings for employers and workers alike.

Worker Dissatisfaction

The Employee Benefits Research Institute (EBRI)/Greenwald & Associates recently released the 2016 Health and Voluntary Workplace Benefits Survey (WBS), which shows that some workers are sacrificing their retirement security in response to rising health care costs. The survey included 1,500 workers between ages 21–64. The results show, among other things, that some workers are reducing their retirement plan contributions, taking loans and withdrawals from their retirement savings, or delaying retirement.

• 28 percent of workers who reported an increase in health plan costs decreased their retirement plan contributions, and 48 percent have decreased their contributions to other savings.
• 12 percent took a loan or withdrawal from their retirement plan.
• 30 percent have delayed retirement as a result of rising health care costs.

Another survey, the 2017 Workplace Benefits Report by Bank of America Merrill Lynch, also indicates that health care costs negatively affect financial wellness. This survey included a national sampling of 1,242 employees across the U.S. whose employers offer 401(k) plans. Survey results show that 79 percent experienced an increase in health care costs in 2016 (up from 69 percent in 2015). Among those experiencing an increase, 56 percent are spending less or contributing less to their financial goals and about 62 percent are saving less for retirement.

HSAs Growing

Although the cost of health care seems to be having a negative impact on saving for retirement, it is shedding light on a possible solution—saving with an HSA. The number of HSAs and the amount of HSA contributions are at all-time highs, and are a clear reflection of growing enrollment in HDHPs. And expectations are that this trend will continue if employers continue moving to HDHPs.

Devenir, a national leader of customized investment solutions for HSAs and the consumer-directed healthcare market, conducts annual HSA market surveys of the top 100 HSA providers. Devenir’s 2016 Year-End HSA Market Statistics and Trends report shows that the number of HSAs exceeded 20 million at year-end 2016 (a 22 percent increase over 2015), holding almost $37 billion in assets (a 20 percent increase).

Of a total $25.5 billion HSA contributions made in 2016,

• 26 percent came from employer contributions ($868 average employer contribution),
• 46 percent from employees ($1,786 average employee contribution), and
• 19 percent from individual contributions not associated with an employer ($1,713 average individual contribution).

The survey also shows that health plan partnerships are the largest driver of new account growth in 2016.

• Health plan referrals account for 37 percent of new accounts opened.
• Direct employer relationships accounted for 32 percent of new accounts.
• The remaining drivers are insurance agent referrals (10 percent), administrator/TPA referrals (9 percent), and individuals (5 percent).

While HSA assets are withdrawn every year to cover medical costs, the amount that is retained in HSAs continues to grow every year. When looking at contribution and withdrawal activity, Devenir estimates that 22 percent ($5.7 billion) of HSAs assets were retained at year-end 2016.

HSA Solution

More Americans are moving to HDHPs—by choice or as driven by their employers—and the number of HSAs continues to rise. Employers and individuals should understand the benefits of HSAs.

• Individuals can pay for current medical expenses or save for future expenses with an HSA—there is no use it or lose it rule.
• Contributions reduce taxable income.
• Earnings on the account build tax free.
• Distributions are tax-free if properly used for qualified medical expenses.
• Individuals who save on medical expenses may have more money in their budget to focus on other savings needs.

Educating employers and individuals about the tax benefits of an HSA will not only encourage HDHP/HSA participation, but can free up funds for IRA and retirement plan contributions.