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New Wave Retirement Planning

Employee Benefit News, October 1, 2007 "New Wave Retirement Planning"

In this interview, Janice Rahm, senior vice president, product and service development with Meritain Health, discusses the increased use of HSAs in retirement planning. Learn more about Janice Rahm.

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By Lydell C. Bridgeford | Employee Benefit News
October 1, 2007

Promoting HSAs as a Way to Supplement Retiree Health Care Coverage

Rising health care costs and longer lifespans probably will mean more people will have to embrace health care consumerism while in retirement, giving employers a different avenue in promoting health savings accounts.

Fidelity Investments reports that a 65-year-old couple retiring today will need $200,000 to cover medical costs in retirement - up 5.3% over last year, and 40% over Fidelity's initial estimate of $160,000 four years ago.

"Knowing that these costs are going to continue to increase, all Americans, even those as far as 20 years away from retirement, should be calculating and factoring lifelong health care expenses into their overall financial planning," says Brad Kimler, senior vice president of Fidelity's employer services company.

In the face of this retirement reality, industry experts are assessing health savings accounts through a retirement lens.

"An HSA allows you to put pretax dollars away to pay for retiree medical premiums at age 65, such as Medicare Part B and D premiums," says Barry Barnett, a principal with the consultancy PricewaterhouseCoopers.

"Also, if your employer had an access-only plan it would allow you to pay for the premiums to the buy the medical plan from your employer," he adds.

Barnett believes HSAs are a tax-efficient way to pay for retiree medical benefits.

For example, if a retiree decides to underwrite his medical expenses via funds from his 401(k) account, he is taxed on those funds. Under an HSA, there is no taxation for health-related items, he notes.

What's more, a retiree who is under age 65 and eligible for a high-deducible health plan can still put money into an HSA to pay for retiree medical premiums.

Some health care analysts argue that these workers and others nearing retirement may not get the full bang for their buck because of the limited time they have to accumulate funds in their HSA. Other experts have a different take.

"No matter the amount of money you accumulate, it's still tax efficient in terms of paying for retiree medical premiums," Barnett explains.

Additionally, individuals who are between ages 55 and 65 are allowed to place additional funds into their HSAs through catch-up contributions, says Janice Rahm, senior president of product and service innovation at Meritain Health, a New York-based provider of self-funded health plans.

"Once you become Medicare-enrolled, you can use your HSA account to purchase other health insurance, with the exception of a Medigap policy," she notes.

From a tax perspective, interest from the account are tax-free, and contributions are all pretax.

Furthermore, once the individuals turn 65 years old, they are no longer hit with the 10% tax penalty if they decide to withdraw funds from their accounts for nonmedical expenses and items.

Challenges to HSA retirement funding

The primary purpose of an HSA is to be a savings vehicle to pay for health care expenses not covered by the high-deducible health plan, says Bill Sharon, a senior vice president at Aon Consulting.

For many people, those expenses could be sizeable while they are still actively working.

It's hard in practice to save money for retirement through an HSA because most people are going to be using their HSA money during their years of active employment, he says, noting that few workers could go for 20 or 30 years without accumulating any health care expenses.

Alternatively, the accounts will appeal to wealthy consumers who can pay for their current health care expenses out-of-pocket with after-tax dollars, thus not tapping into their HSA accounts.

However, "both of these categories are in the minority" in terms of the nationwide American workforce, says Sharon.

Another major obstacle is the fact that the majority of workers are not offered HSAs as part of their company's health plan options.

Recently, the Bureau of Labor Statistics reported full-time workers in management and professional occupations at large firms are more likely to be offered HSAs than lower-paid workers at smaller firms.

Only about 8% of workers had the opportunity to use a health savings account this year, up from 6% last year, the agency notes.

An employer can say to its workers that an HSA could serve as supplemental retiree medical vehicle, but it will not serve as a primary source to underwrite retiree health care costs, Sharon explains.

Meanwhile, companies that adopt HSAs are softening the burden to their long-term retiree medical liability, says J. Scott Bradley, vice president of employee benefits division at New York-based Cook, Hall and Hyde, Inc., an independent insurance and risk management company.

Adoption is not a panacea, though, given that "about 10% of workers nearing retirement are familiar with HSAs and HRAs," he adds.
Employee education and communication about HSAs is paramount.

Yet overall, "the focus of these accounts is not about retirement, but about being proactive in addressing health care costs and encouraging people to be active consumers in the health care delivery system," he adds.

Curt Palmer, senior vice president of consumer solutions at Alabama-based DST Health Solutions, a provider of consumer-driven health plans, remarks,"People intuitively know during retirement their health costs are going to be burdensome, but very few people do anything substantial to address it."

Considering health care inflation, employees need to take advantage of all the opportunities to put aside money for health care in retirement, he explains.

The new HSA landscape recognizes retiree health costs in that new rules favor employees in terms of catch-up contributions and higher allocation amounts.

Under the new fedeal guidelines, Palmer adds, workers can now transfer funds from their 401(k) and IRA accounts into their HSAs.

"Retirement is an event that puts the onus on the individual. It takes away the protection the employer had offered the individual as a worker," explains Vishal Sibal, president of the Michigan-based consumer-driven health plan administrator Sanare LLC.

HSAs are designed, in part, for the individual consumers to better administer and control his or her health care spending.

"We see retirees, even those who work part-time, becoming more engaged in health care expenses," he says.

Research shows most retirees and people close to retirement are the biggest navigators of health-related content on the Internet.

These factors favor account-based health plans.

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Publication Date: 2007-10-01

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