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HSAs and Retirement Planning

With the rising cost of health care, some workers are concerned they won’t be able to save enough for retirement. In fact, of workers who reported cost increases in their health plans in the past year:

  • 26% decreased their retirement plan contributions
  • 43% decreased other savings contributions
  • 15% took a loan or withdrawal from a retirement plan, and
  • 27% delayed retirement1

For those who want a retirement saving strategy that includes saving for future medical expenses, a Health Savings Account (HSA) may be a solution. HSAs are savings accounts that help individuals manage short-term medical expenses. They can also help build long-term savings that can cover health care or other costs in retirement. As an employer, you may be able to help your employees establish and fund these accounts.


HSA Benefits

HSAs have become popular savings vehicles because they offer a triple tax benefit:

  1. Contributions are deductible
  2. Investments grow tax-free in an HSA
  3. Withdrawals are tax and penalty-free if used to pay for qualified medical expenses of the HSA owner, a spouse, or dependents

These tax benefits are available whether individuals use their HSA to cover current medical expenses or use the account to help pay for medical expenses during their retirement years. Prior to age 65, HSA distributions are taxable and subject to a 20% penalty if used for anything other than medical expenses. After age 65, HSA payouts not used for medical expenses will be taxable but not subject to penalty.

Who is eligible for an HSA?

Individuals may only contribute to an HSA if they have a high deductible health plan (HDHP). Many employers offer HDHPs as a health care option to their employees to help control insurance costs. In exchange for lower premiums, an HDHP typically requires individuals to pay a higher deductible (compared to a full-coverage healthcare plan) before coverage begins each year. HSAs help individuals set aside money to cover medical costs not covered by HDHPs, such as their deductibles.

To be eligible to contribute, individuals generally may not be covered by another health plan, be enrolled in Medicare, or claimed as a dependent on another person’s tax return. Once you establish and fund an HSA, however, you can take tax-free withdrawals even if the HSA owner later becomes ineligible to make new contributions to an HSA.

What are the contribution rules for an HSA?

The maximum contribution allowed each year for an HSA depends on the type of HDHP coverage: single or family. For tax year 2018, the contribution limit for someone who had single coverage for the full calendar year is $3,450. For a full year of family coverage, the maximum contribution is $6,900 for 2018. Individuals who are age 55 or older may make an additional contribution – called a catch-up contribution— of $1,000 per year. If an individual is eligible for only a portion of the year, they generally prorate the maximum contribution for the number of months of eligibility during that calendar year. Most individuals fund their HSAs through payroll deduction with their employer, but individuals may also fund their HSA directly.

Many employers choose to contribute to their employees’ HSAs. These contributions are deductible by the business. Any amounts contributed to employees’ HSAs must be aggregated with the employee contributions when calculating the maximum annual contribution.

Employers that offer an HDHP option will typically select an HSA service provider (such as a bank or insurance company) to hold HSA contributions and administer their employees’ accounts. These HSA programs offer a menu of investment options that may include mutual funds and other investments that may be appropriate for long-term savings in an HSA, in addition to a savings account option that can be used for a portion of the account balance that may be needed to pay for current expenses. Some financial organizations offer HSA debit cards and checking accounts to facilitate payment of medical expenses directly from the HSA.

How do I balance retirement and medical savings?

Individuals can maximize their retirement and medical savings opportunities with an HSA. How? Contributions to an HSA do not affect how much one can contribute to a 401(k) plan. For example, assume an employee is over age 55 and has family coverage through his employer’s HDHP. This employee, with sufficient compensation, may make the following pre-tax contributions for 2018:

$18,500 | 401(k) salary deferrals

+$6,000 |401(k) catch-up contribution

+$6,900 | HSA contribution (for family coverage)

+$1,000 | HSA catch-up contribution

$32,400 | Deductible contribution for 2018

There are different strategies to maximize the savings opportunities of HSAs and 401(k)s. Because of the triple tax benefits HSAs offer, some workers will fund their HSA before maximizing their 401(k) contributions. Others will first fund their 401(k) to the level needed to receive the full matching contribution. Then, they contribute the maximum HSA amount before making additional 401(k) contributions. HSAs may also provide a way to supplement retirement savings for employees whose 401(k) contributions are limited by the Actual Deferral Percentage (ADP) test.


Start Here

With the tax-advantaged savings vehicles available today, workers shouldn’t have to choose between saving for retirement and saving for health care. In addition to helping pay current medical costs, HSAs are increasingly being used in retirement saving strategies. Because HSAs are not forfeited at year-end, like other types of medical savings arrangements, HSA balances can be built up to pay medical expenses that are likely to occur during retirement.

A plan advisor can help you and your employees understand how to balance saving both for health care expenses and retirement.

  • See IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information on HSAs (
  • Ask your advisor for basic HSA training. This includes an explanation of long-term savings benefits and options available to you by HSA providers.
  • If you provide an HSA option to your employees, provide education on the tax benefits, contribution rules, and ability to coordinate HSA contributions with retirement savings.

For more information, contact Benefit Trust.

1 Employee Benefit Research Institute, Notes Vo. 39, No. 1, Worker Rank Health Care as the Most Critical Issue in the United States, January 25, 2018,