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White Paper

Financing health care in retirement

The role of the health savings account

December 7, 2020

COVID-19 has taken an emotional and financial toll on many. As employees reassess their wellbeing to address these changes, HSAs must be at the forefront given their tax efficiency.
Benefits Administration and Outsourcing Solutions|Retirement

The onset of COVID-19 in 2020 has upended basic business operations and the way our work gets done. It has also led many to reassess their wellbeing to address changes that have taken not only an emotional toll but also a financial one. Given their tax efficacy, health savings accounts (HSAs) must be at the forefront of that examination.

This paper explores the importance of HSAs for saving for health care in retirement and makes the case for employers to provide decision support tools and educational programs that encourage a disciplined use of the accounts. Employers will play an essential role in that process by helping employees determine their health care costs in retirement, understand different retirement health care options and create an appropriate savings plan that fits their individual needs.

This paper considers:

  • The health care cost that Medicare-eligible retirees must pay through premiums and point-of-care cost sharing. The average retiree will have costs of $5,000 to $6,000 per year even after considering the services covered by Medicare.
  • The different ways Medicare-eligible retirees can access coverage. Most retirees can either purchase a Medicare supplement plan with a prescription drug program or replace Medicare with a Medicare Advantage plan that also covers prescription drugs.
  • The aggregate cost that a retiree will likely face and the variability of that cost depending on the retiree’s health as well as the plan the retiree selects. Helping retirees make the best selection will go a long way to making their money last.
  • The tax efficiency of an HSA, the only funding vehicle where amounts are never taxed if used to purchase eligible health care expenses. No other retirement savings vehicle has the same tax advantages as an HSA, meaning that a tax adjusted dollar saved in an HSA can be worth significantly more than an unmatched dollar saved in a 401(k) plan.
  • The ability for an HSA to fund the cost of health care in retirement. Those who start saving early in their career (over 25 to 30 years) can fund the full cost of health care in retirement but may limit their ability to cover current year out-of-pocket costs or fund a significant health care event prior to retirement. Those who start saving later in their career are restricted by limits on HSA contributions that limit their ability to fund the full cost of health care in retirement.

The second part of this paper explores how best to leverage an HSA. We discuss the importance of getting an employee to participate in a health plan that allows the employee to use an HSA and the value of an HSA when compared with a 401(k). We explore saving strategies such as paying for some cost while working with after-tax dollars so that more can be saved for retirement on a tax-free basis as well as some of the considerations around spending the money in retirement.

Title File Type File Size
Financing Health Care in Retirement PDF 12.2 MB

Managing Director, Benefits Accounts
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Senior Director, Retirement
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Chief Actuary, Health & Benefits North America
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