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HSA vs. FSA

Apr 5, 2021
Empower Institute

Only one account can boost employees’ retirement savings. Make sure your employees know the difference.

While the use of high-deductible healthcare plans and health savings accounts (HSAs) is on the rise, many employees still don’t fully understand the advantages of these options. The problem: Many employees view HSAs as entirely unrelated to retirement, even though contributing to an HSA can be an effective, tax-advantaged way to supercharge savings and offset healthcare costs both now and in retirement. However, employers can play a powerful role in changing the way workers see HSAs and subsequently increase enrollment. Empower Retirement research shows that when employers align HSAs alongside their retirement plans, they are more likely to understand HSAs’ potential benefits.

Employees’ misapprehensions about the best use for an HSA are in some ways entirely logical: HSAs have been historically positioned alongside the medical insurance plan, so employees often associate them with their current healthcare needs and expenses. They’re often told the HSA is a tax-efficient spending account, with the added advantage that leftover balances roll over to the next year, ultimately creating healthcare savings. Viewing HSAs through this lens has left employees in the dark on the accounts’ benefits as a long-term tool for retirement savings.

Instead, employers could reposition the HSA alongside the workplace retirement plan. This new orientation positions HSA retirement savings as a tax-efficient savings account, where employees can build up a tax-free fund for healthcare expenses in retirement — with the added advantage of accessibility in case they need to cover an out-of-pocket expense before retirement.

In addition, employers should pay attention to design — a particularly powerful tool in changing employee behavior. Empower Retirement, for example, has included its logo on the HSA web platform and debit card, as well as within communications and all aspects of the employee experience. That visual marker has helped employees see their HSA as a component of the retirement plan, which has led to an increase in employee contributions.

Our data show that recasting HSAs as a piece of their retirement plan has led more employees to contribute to the HSA. It’s no longer seen as a separate, unrelated account just for current medical expenses. Employees understand that contributing to an HSA as a retirement account is part of a long-term strategy that can help them prepare for retirement. With this context made clear, they see the HSA retirement savings as a significant improvement over a “use it or lose it” flexible spending account (FSA).

Presenting the HSA retirement account as a component of the overall retirement plan has made a clear impact on Empower employees’ use of their HSAs. Our data show that compared to the industry average, not only are more Empower employees using their HSA retirement savings, they’re also contributing more money, and more of them are investing their assets.

And employees aren’t the only ones who benefit from this approach. Increased employee HSA retirement contributions create a virtuous cycle in which employers can increase their HSA contributions due to the FICA tax savings they experience on employee contributions.

Another way employers benefit: HSAs may help reduce delayed retirement, which can be costly for employers. HSA retirement savings can help workers grow their savings faster and create a tax-free pool of assets to tap for healthcare expenses in retirement, which may help them retire on time.

Increased contributions from employees and employers can result in better outcomes for plan participants. With more money saved, employees are better prepared for the significant out-of-pocket medical expenses they’re likely to pay in retirement. And that savings can help them retire when they intend to, rather than delaying retirement and driving up employer costs.

Takeaways for plan sponsors and intermediaries:

  • To boost employees’ retirement readiness, frame HSAs as part of a retirement savings strategy, rather than a savings account for current health expenses.
  • Partner with a recordkeeper whose technology solution positions HSAs as a tool for retirement planning.
HSA vs. FSA. Research paper download

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