Rising medical expenses can impede retirement savings. Not only do high costs affect plan participants’ ability to make contributions during working years, but they can also consume assets post-retirement. Consider these statistics:
 

• 374%: Increase in U.S. health care spending per person from 1990 to 2022, from $2,835 to $13,439¹
  
  
• $351K: Projected savings many 65-year-old couples will need to have a 90% chance of covering their health expenses in retirement ²
  
  
• 41%: Increase in the cost of medical care compared to the cost of consumer goods and services since 2000³
   

To help contain these costs, many companies have moved to consumer-driven health plans (CDHPs), which carry lower monthly premiums but higher employee deductibles. Such plans are often paired with a tax-advantaged health savings account (HSA) to cover out-of-pocket expenses.

The role of health savings accounts

Although HSAs were originally introduced as a cost-saving measure, many employers are realizing that these accounts can work effectively with a defined contribution (DC) plan to promote better retirement outcomes.
 

HSAs offer several advantages to the employee. For starters, HSA assets enjoy triple-tax-advantaged status at the federal level. ⁴ Employees enrolled in CDHPs can contribute to HSAs with pretax money. Any earnings grow tax-deferred. Unlike DC plans, distributions are not taxed if used for qualified medical expenses. While there are annual contribution limits, there is no cap on how much can be invested and retained in the account.
 

Account holders are also able to “stow it and grow it.” HSA assets can be withdrawn at any time without penalty (for qualified health care expenses), and unused balances can accumulate. Employers often contribute to an employee’s HSA. Money can be used on a wide range of health spending. And for those 65 and older, there is no 20% tax penalty for distributions, although distributions are taxable if not used for qualified health care expenses.
 

Additionally, HSA assets can be invested to help build savings for health care expenses. For short-term investments, consider setting aside one year of maximum health care insurance deductibles. Amounts beyond that can be invested for growth for overall financial wellness and to cover medical expenses in retirement.

HSA assets are growing

At the midyear point of 2024, there were 38 million HSAs holding $137 billion in assets, a year-over-year increase of 5% for accounts and 18% for assets. About 3.2 million of those accounts are investing a portion of their assets. 

Employee education is key to success

For many retirement savers, the full range of HSA benefits may not be immediately obvious. That’s why education is so important. To achieve better outcomes with HSAs, participants need to first understand what’s possible.

When planning an HSA education program:

• Clearly distinguish HSAs from other health savings vehicles, such as “use it or lose it” flexible spending accounts (FSAs).
  
  
• Highlight the costs of medical care in retirement and how an HSA can be used to address them.
  
  
• Explain differences in tax treatment between HSAs and DC plans.
  
  
• Outline ways to distribute contributions among HSAs, DC plans and other benefits. For example, employees might first put enough in their retirement plans to maximize their employer’s match, then put enough in an HSA to meet one year’s deductible and then invest part of the HSA.

Investing for future health care costs

As HSAs grow, plan sponsors are approaching investment options similarly to DC plan investments. Like retirement savers, HSA enrollees have varying risk tolerances and financial situations when investing for future health care costs. An HSA investment menu can address a range of objectives and life stages much like a DC plan menu.
 

Ideas from DC menu planning that plan sponsors can apply to HSA menu arrangements:
 

• A mix of investment options: Risk and financial situation are highly individualized, so the menu should contain a range of choices, including some that focus on stable investments.
  
  
• Target date: The target date series used in DC plans may be an effective way of investing for long-term health care costs in a single investment solution. 
  
  
• 401(k) mirroring: Offering a core investment menu similar to the DC plan organizes the benefits package for employees and simplifies the due diligence process for employers.

An age-based framework to consider

As participants progress through career stages, their goals, financial situations and risk tolerance often follow patterns well established in DC menu planning. Because those factors also influence HSA investment decisions, they can be used in HSA investment planning. 

A holistic approach to saving

To best prepare for a healthy retirement, participants will be well served by a holistic approach to saving. That includes understanding and accessing the full range of their benefits and investment solutions. With support and guidance from plan sponsors and financial professionals, savers can learn to view HSAs as not simply a health care benefit but a pillar of retirement security.

Looking to add an HSA to your lineup? Check out 10 tips for choosing an HSA provider.

Read important disclosures