A surge in interest in financial wellness programs and more involvement from retirement providers is shifting healthcare coverage in new tax-friendly directions. A report from Cerulli Edge explains.

New analysis from Cerulli points to slow but steady changes in the way consumers are planning healthcare protection as part of their retirement planning, in particular the larger role that health savings accounts (HSAs) could play. The use of these accounts so far has been derisory compared with what investors are pouring into 401(k) plans or individual retirement accounts (IRAs), according to the Boston-based consultancy group.

HSAs have been around to members of high-deductible health plans for more than 15 years. Despite this, Cerulli’s most recent 401(k) survey showed that HSAs are not on most people's minds. When asked how they would allocate an additional $1,000, respondents ranked HSAs last out of about a dozen options. On top of this, employees rarely use them to their full capacity, even though they are the most flexible, tax-favored vehicle for covering medical costs, according to the latest Cerulli Edge, US Retirement edition.

“Retirement advisors and financial planners generally acknowledge the triple tax-advantaged nature of these accounts, making them an attractive vehicle for long-term savings, but many investors are in the dark,” associate director at Cerulli, Anastasia Krymkowski, said.

Given that a medical emergency or costly procedure is likely to happen at some point, investors should plan ahead and cover these expenses with tax-advantaged dollars whenever possible, Krymkowski said. “After contributing enough in the 401(k) to earn the full employer match, a participant’s ‘next dollar’ is likely best directed to an HSA, if available.”

In light of the global health crisis wrought by COVID-19, retirement providers, including recordkeepers, advisors, consultants and so forth, are all becoming more involved in financial wellness planning that takes full account of healthcare costs. Cerulli suggests that the benefits of HSAs in longer-term health planning should not be overlooked and certainly should be better understood.

In a recent poll, the group found that more than 40 per cent of defined contribution plan recordkeepers participated in the HSA market in 2019, up from 21 per cent two years previously, a trend the group sees continuing, with retirement providers stepping up to educate investors.

"Employers and financial services providers should discuss HSAs in the context of emergency savings and retirement planning, not just healthcare elections during annual enrollment," the analyst said. "The most effective campaigns will adapt to meet plan members at each stage of the process—whether recognizing the value of an HSA and opening an account, funding to meet the deductible, accumulating assets, or investing for the long term,” Krymkowski added.