Millennials’ HSA Enrollment Grew 40% in 2017. Health savings account (HSA) enrollment is on the rise among younger workers, particularly with millennials and Generation Z. They are likely to be better off in retirement as a result.
A new study from employee benefits firm BenefitFocus, quoted in an article from HRMorning.com, found that the number of eligible millennials under age 26 enrolling in an HSA rose by staggering 40% in 2017. The same study, The State of Employee Benefits 2017, found that millennials increased their HSA contributions by an average of $200 in 2017.
According to the article’s author, Sean Hanftm, Flexible Compensation Specialist with FSAstore.com/HSAstore.com, HSAs provide a one-two punch benefit in that they boost retirement earnings potential while allowing individuals to fund their current healthcare costs.
HSAs are funded with pre-tax contributions, subject to annual contribution limits ($3,450 for individuals, $6,900 for families in 2018). They also offer a triple-tax savings advantage: again, money goes in before taxes, and interest and withdrawals for qualified health expenses are not taxed. Account owners can roll over unused funds from year to year. In addition, HSAs offer individuals the ability to invest the unused portion to take advantage of compound growth over time.
HSA funds not used for qualifying medical expenses are subject to a 20% tax penalty. However, they become an attractive option for workers to augment their retirement savings because once an individual reaches Medicare age at 65, they can withdraw the money and it’s only taxed as income — that additional 20% tax penalty is no longer applicable. So again, not only can workers use the funds they are saving today to cover existing healthcare expenses, they can also use those savings later to give themselves an additional cash cushion in retirement.
Hanftm points out that millennials find HSAs appealing because of their long-term savings potential. He cited a 2014 census report that 66% of millennials having no retirement savings at all. Ironically, however, they have more retirement savings options than previous generations, including HSAs.
That said, HSAs aren’t a standalone retirement savings option, but they can significantly contribute to improved financial security in retirement in combination with other, more traditional options. Here’s an example from the HRMorning.com article that breaks it down. Hanftm writes:
“For this exercise, we’ll consider an unmarried professional who begins saving at age 30, contributing the HSA maximum ($3,450) annually in 2018.
- HSA:With an annual contribution of $3,450 (2018 limits) that earns 2% interest rate — $176,568.00 (after 35 years)
- 401(k):With a starting salary of $50,000, a contribution rate 6.9% ($3,450/year), an average salary increase of 4% an average rate of return of 7% and a 0% employer match — $803,051 (after 35 years)
- Traditional IRA: With an annual contribution of $3,450 and average rate of return of 7% — $510,301 (after 35 years)”
He characterizes HSAs as a good supplemental option to traditional retirement savings vehicles. That said, millennials and Generation Z employees tend to prefer online options to manage and simplify all aspects of their lives, including their benefits. HSAs are no exception, and Hanftm points out that online tools such as those that allow account holders to select the best HSA for their needs, estimate long-term HSA savings, and manage their HSA accounts and investments are appealing to the younger crowd for precisely that reason.
If your organization offers an HSA as a benefit, continue to educate employees on the tax and savings advantages for their current healthcare costs and future retirement needs. The data indicates they’re coming around to the benefits of HSAs on their own, but it never hurts to make sure they know the option is available to them, and that they understand how it can help them today and tomorrow.
