HSA Savings Can Cover Much Of The Cost Of Retiree Health Costs For Older Workers

Used with permission 6-3-08 (please do not forward outside of your organization)

CDHealthWire June 3, 2008

[Consumer Driven Market Report] A new EBRI analysis of the required savings to meet retiree health costs shows that many older workers can save enough in an HSA to cover post-65 health costs even if starting as late as age 55. The median savings needed is $102,000 for a man and $137,00 for a woman, assuming no employer retiree coverage. If the employer provides some coverage it’s $64,000 and $86,000.

The maximum HSA contribution for over-55 individuals with family coverage this year is $6,700. If that contribution is made every year with 5% in account income the HSA reaches over $84,000 by age 65, a good portion of retiree health needs based on the new estimate.

All available studies including the GAO report to Congress show that HSA contributions are exceeding HSA distributions by a large amount, even in early populations. This paves the way for the argument that HSAs are a valid retiree health model for a portion of U.S. workers.

The new numbers are important though because many benefits consultants, banks, and carriers are seeing fast-rising demand from employers for some form of defined contribution combined with HSAs for pre-retirees to try and capitalize future retiree health spending.

For example, an employer wanting to provide retiree health benefits but not a full defined benefit plan can simple make maximum HSA contributions to 55-year-old workers for 10 years and reach the savings needed to cover most out-of-pocket costs for the employee during retirement. If HSAs are started all workers by an employer with the average workforce age of 42, all out-of-pocket costs can be covered.

This model is already catching on with employers using VEBAs, a form of pre-retiree funding based on HRAs that roll over and accumulate. So far HSAs have not been as broadly discussed as an employer solution, but with HSAs now reaching 10 million some employer RFPs for next year are citing HSAs and VEBAs as something insurers must offer.