Health savings accounts (HSAs) are likely to play a minor part in savings for Americans’ health care costs in retirement, according to a report by the nonpartisan Employee Benefit Research Institute (EBRI). That’s because statutory contribution limits and currently low interest rates constrain the amount that HSAs are able to generate, compared with the large amount needed to pay for retiree health expenses.
The report, The Use of Health Savings Accounts for Health Care in Retirement, evaluates the use of HSAs to generate savings needed to cover health insurance premiums and out-of-pocket expenses for health care services in retirement, using estimated Medicare payments and earlier EBRI research on retiree health costs.
Based on 2010 interest rates, if an individual age 55 in 2009 were to contribute $3,000 to his or her HSA and contribute the $1,000 catch-up contribution (permitted at age 55) each year for 10 years, $48,300 would be in the account after 10 years at a 2 percent interest rate. If the interest rate were 5 percent, $55,100 would be accumulated at the end of 10 years.
However, as the report notes, such savings are inadequate to cover health costs in retirement:
• A man age 55 in 2009 would need $144,000 to $290,000 by the time he reached age 65 in 2019 (depending on his use of prescription drugs in retirement) to have a 50 percent chance of being able to cover premiums and out-of-pocket expenses for Medigap and Medicare Part D.
• Women, who live longer than men on average, would need more.
“One of the difficulties in using an HSA to save money for premiums and out-of-pocket expenses during retirement is that contributions are limited by law,” says Paul Fronstin, director of EBRI's Health Security and Quality Research Program and author of the report. “As a result, the savings needed for retiree health care far exceed the savings potential of an HSA.”
Fronstin points out that individuals can, and might need to, use the money in the account to pay for health care services during their working years or to pay COBRA premiums and insurance premiums during periods of unemployment. Distributions from the HSA prior to becoming eligible for Medicare will erode the value of the account and create a bigger gap between needed savings and the amount of money that an HSA would have once a person retires.
The EBRI report notes that there are several options that Americans might have to save for retiree medical expenses, such as HSAs, health reimbursement arrangements (HRAs), retiree medical accounts (RMAs) and voluntary employee benefit associations (VEBAs). However, the report focuses on HSAs because these are the only accounts that are always portable for the employee and owned by the employee.
An HSA is an individual-owned, tax-exempt account linked to a high-deductible health plan that can be used to pay for health care expenses not covered by the plan. Contributions to an HSA can be made by the employer and/or employee and are deductible from taxable income. Distributions for qualified medical expenses are not counted as taxable income. Earnings on contributions are also not subject to income taxes. Once enrolled in Medicare, beneficiaries are not permitted to continue making contributions to an HSA.
The report states that the present value of lifetime benefits from Medicare for a husband and wife turning age 65 in 2010 has been estimated at $376,000. Since Medicare on average covers a little more than one-half of health care costs for beneficiaries, the typical husband and wife will need a little less than $376,000 in savings to cover what is not covered by Medicare.
However, as previous EBRI research has shown, the issue with using this average is that people cannot assume that their needs will be average. While half of men who turned age 65 in 2008 will live to age 81 and half of women will live to age 84, about 25 percent can be expected to live until ages 87 and 90, respectively. Furthermore, one out of 10 men age 65 in 2010 can expect to live until 91, while one out of 10 women can expect to live to 95.
This means that a significant number of Americans will live far longer than the average for their gender, and uncertainty related to life expectancy and other factors make saving for retirement increasingly complicated.
“This research shows that while HSAs can be used to save for health care expenses in retirement, the maximum savings that can be accumulated in an HSA will be far from sufficient to fully cover the savings needed in retirement for insurance premiums and out-of-pocket expenses,” Fronstin sums up.
Stephen Miller is an online editor/manager for SHRM.
Savings and Retiree Health
Help your employees to understand saving for health care expenses in retirement, advises Dan Houston, president of retirement services at the Principal Financial Group.
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Relate SHRM Articles:
Health Insurance Exchanges and Early Retiree Health Coverage, SHRM Online Benefits Discipline, August 2012
Estimate: Retiring Couples Will Need $240,000 to Pay Medical Expenses, SHRM Online Benefits Discipline, May 2012
Health Savings Accounts Can Build Retirement Wealth, SHRM Online Benefits Discipline, October 2010
HSAs Could Play Larger Role in Retiree Medical Care, SHRM Online Benefits Discipline, August 2008
Genworth 2010 Cost of Care Survey, Genworth Financial
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page