Health insurance premiums have shot up 242% since 1999 — more than double the rise in corporate profits and quadruple the growth in wages. An investment strategy that covers exploding health care costs requires different kinds of thinking for individuals, companies and advisors. So many are looking at health savings accounts (HSAs) as a powerful way to invest for the long-term costs of health.
Many companies trying to hold down premiums offer high-deductible health plans (HDHPs) to their employees. These policies make employees responsible for more of their medical bills, in much the same way that the shift from pension to 401(k) plans moved responsibility for retirement investing from companies to workers.
To help them handle this responsibility, many companies pair HDHPs with health savings accounts, which are tax-advantaged individual investment accounts to fund medical expenses. At the end of 2016 there were 20 million HSAs in the U.S., a 20% increase from just a year earlier. Moreover, HSAs are a centerpiece of current proposals to replace the Affordable Care Act, so the adoption trend looks likely to accelerate.
HSAs are designed to make it as easy as possible for employees to pay for health expenses, so they, like traditional IRAs, come with some powerful tax incentives. Employees can:
In addition, any unused funds can be transferred to spouses for their health care needs (the funds are taxable for non-spousal beneficiaries).
This is a great opportunity for financial advisors who normally work with retirement plans.
“Health savings accounts are here to stay,” says Ryan Tiernan, national accounts manager at American Funds. “Plan advisors should be talking to their sponsor clients about how to help their employees pay for health care costs with HSAs.”
Participants shouldn’t have to face a choice between adequate medical coverage and adequate retirement savings. But rising health insurance premiums inevitably reduce retirement savings.
“An HSA can help bulletproof a 401(k) against the impact of rising health care costs,” says Tiernan.
Employees who take advantage of HSAs may have an edge when it comes to retirement savings. That’s because health care is one of the biggest – and most anxiety-provoking – expenses during retirement. Employees can contribute up to $3,400 for themselves or $6,750 for their families in 2017. This can go a long way toward paying for health costs in retirement.
Health savings accounts have existed since 2003, but many advisors have little knowledge of them – and may not be aware of their triple-tax-free benefits or the vast population of investors these accounts could potentially serve. Even advisors who know about them can mistakenly assume that because they are part of a health insurance plan, they are insurance products. In fact, HSA cash balances can be used either for ongoing health costs or to fund longer-term investment accounts.
In addition, many participants and companies with HSAs don’t realize that, unlike flexible spending accounts that force participants to use their funds by the end of the year, HSA account balances roll over from year to year. Simply explaining that the HSA is not “use it or lose it” but “stow it and grow it” can do wonders to persuade those in a position to take advantage that HSAs can be a powerful financial planning tool.
Savvy advisors who know about this powerful new trend, and can articulate the very real retirement savings opportunities it presents for participants, can expand their plan practice in potentially exponential ways – before the competition even knows what they are doing.
The skills that financial advisors have developed with retirement benefit accounts — such as providing employee education and building investment lineups —transfer easily to managing HSAs.
“Good financial advisors and consultants are uniquely qualified to help clients understand and prepare for this investment opportunity,” notes Tiernan. “HSAs may in fact be the next megatrend for financial advisors, asset managers and recordkeepers to expand their suite of services.”
It’s hard not to embrace an investment vehicle with triple-tax-free capabilities, a multitude of investment options, and a direct tie to the employer’s total benefits package.
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