Here’s what your employees need to know about health savings accounts. Most people know that a 401(k) plan is a valuable retirement tool. It’s less well-known that a health savings account (HSA) also is a valuable retirement tool. Not only is an HSA a great way to save for medical expenses while employed, but the same savings account also can be used during retirement.
An HSA is a tax-advantaged savings account that employees can use to pay for out-of-pocket medical expenses. HSAs always are paired with qualified high- deductible health plans (HDHPs). Qualified HDHPs have low premiums but high deductibles and when HSAs are used for qualified medical expenses, HSAs have a triple tax-free benefit: pre-tax contributions; tax-free growth; and tax-free withdrawals for qualified medical expenses.
If you offer an HDHP at your company, make sure your employees understand that HSAs also have some great retirement benefits. According to Fidelity Investments’ Retirement Health Care Cost survey, the cost of health care for the average couple throughout retirement is $280,000. Even with Medicare coverage, retirees should expect to pay for premiums, co-pays, some drugs and other expenses not covered by insurance.
Money deposited in an HSA and saved for retirement can help cover these costs. Here’s what your employees need to know:
Who Can Open an HSA? Any employee may open an HSA if they participate in a company HDHP and have no other health insurance; are not enrolled in Medicare; and cannot be claimed as a dependent on someone else’s tax return. Benefits of an HSA. An employee’s account balance grows tax-free and any interest, dividends or capital gains earned are nontaxable, unless withdrawn for non-medical expenses. Also, any contributions you make to an employee’s account are not counted as part of their taxable income. Unlike a flexible spending account (FSA), the balance can be carried over from year to year. Employees also take their HSA with them if they accept a position with another company or when they retire.