Historically, those approaching or entering retirement have significantly underestimated their cost of living, particularly when it comes to healthcare. This trend is beginning to change, however, with younger generations getting ahead of future expenses by exploring a wider range of retirement avenues, including health savings accounts (HSAs). According to the 2022 Devenir & HSA Council Demographic Survey‡, one in five Americans in their 30s had an HSA at the end of 2022.

Additionally, younger consumers are not just saving in their HSA, they’re also taking advantage of the investing options. The Employee Benefit Research Institute’s (EBRI) Analysis‡ shows how younger generations are becoming power users of HSAs, with Millennials and Gen Z representing 60% of all investment accounts.

As younger generations continue to embrace HSAs, including Millennials, who make up more than one-third of the current workforce at 39.4%‡, it’s critical they understand how to maximize HSAs for both short- and long-term goals.

Employers have the opportunity to help educate employees on how to maximize their HSAs.

How HSAs work

There are many advantages to having an HSA. Begin by familiarizing employees with the account options so they can understand how to maximize their usage.

Here are some quick facts to highlight:

  • An HSA is an individually owned, tax-advantaged account.
  • The money an employee puts in can be used for qualified medical expenses at any time, including during retirement.
  • The 2024 maximum contribution amount for individuals is $4,150 and $8,300 for family coverage.
  • HSAs have a triple tax advantage: tax-free deposits, earnings, and withdrawals.

To open and contribute to an HSA, employees must:

  • Be enrolled in a high-deductible health plan (HDHP)
  • Not be enrolled in any part of Medicare
  • Not be claimed as a dependent on another’s taxes
  • Not have any other non-permissible health coverage, such as a medical plan other than an HDHP or a flexible spending account (FSA)

It is important to remember that employee contributions actually help employers avoid the 7.65% payroll tax on every dollar their people contribute. Additionally, to help ensure success and HSA adoption among employees, employers need to consider contributing to their employees’ HSAs. This decision will also help drive employee participation and is a valuable tool for recruitment.

During annual enrollment, employers should remind their employees of the various ways they can open an HSA, such as through their employer or with an HSA provider. It is important for employees to know that their HSA is entirely their own, the account will stick with them throughout every life stage, with unused funds rolling over each year – regardless of their employer.

Using HSAs for saving and investing

When it comes to Millennial and Gen Z employees getting the most out of their HSAs, their young age paired with the ability to start saving early are their greatest assets.

As mentioned earlier, intentionality when investing within HSAs is a great way to potentially maximize HSA dollars. Just like other retirement accounts, strategic allocation can significantly affect savings—particularly if employees intend to earmark some or all these dollars for the long-term.

Employers need to emphasize to their employees that HSAs should be viewed as one piece of their overall financial portfolio. Employees should regularly review all the accounts they are actively contributing to, such as their 401(k) and emergency fund, as well as any debt they are currently paying toward student loans or other financial obligations, to ensure balance and diversity.

Spending HSA funds correctly

In addition to maximizing their contributions, employers should be sure their employees understand what is considered a qualified medical expense that their HSA dollars can cover. For example, if an employee uses their HSA for a non-qualified expense, they’ll have to pay ordinary income tax on the withdrawal and will be hit with a penalty fee of 20% of what they took out.

Some examples of qualified medical expenses include:

  • An employee’s deductible
  • Dental treatments, exams or cleaning costs
  • Prescription drug costs
  • Vision expenses such as contact lenses or glasses
  • Chiropractic or acupuncture fees
  • Hand sanitizer
  • Eye surgery

Employees can find a full list of HSA eligible expenses in the IRS Publication 502‡.

HSA use often changes as employees age

Remember, as employees move through life and their financial goals change, so will the way they utilize their HSA. When they’re in the early stages of being an accountholder, they’re likely also just starting out on the salary spectrum, so they may be contributing less. They may also be spending more, particularly if they have a family. As they move further into their career, they may be earning more and can therefore save more in their HSA. Toward the end of their career, they will hopefully be able to take full advantage of the saving and investing opportunities that their HSA provides. Finally, once they reach retirement, they can keep as much of their HSA invested as possible while utilizing it to cover qualified medical expenses.

The bottom line employers need to reinforce to their employees belonging to younger generations is that their HSA is a lifetime account, and if they start maximizing its benefits at a younger age, it has even more time to grow with them and help meet their ever-changing needs.

Learn more about UMB Healthcare Services and how we can help with benefit spending and saving accounts Read more about the state of the industry at 2022 Devenir Mid-year HSA Market Statistics & Trends Report.

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