Retiree Health Costs And Employee Ignorance

retirement_roadMy Comments: This article appeared recently in a weekly summary of articles designed for advisors whose clients are typically small businesses. At this point you need to ask for a definition of “small business”.

It depends. About 30 years ago I qualified to attend an insurance conference. I was roomed with a fellow advisor from Pittsburgh and we were talking about an idea appropriate for a “small business”. I suddenly asked him what he meant by a “small business”. His response was a company with annual revenue of from $25M to $100M. He said there were hundreds of them where he lived.

In 1985, here in Alachua County, there might have been one private employer whose annual revenue exceeded $50M. My definition of “small business” was a company with from 3 – 25 employees with revenue of maybe $1M per year. No wonder I never qualified for the annual trips.

Meantime, here we are in 2015 and wondering how we are going to finance the health care costs in our respective retirements. It’s not a pretty picture.

by Richard Stolz / MAR 16, 2015

How many of your employees will be short of money in retirement if they ignore the prospect of requiring long-term care? Answer: All of them.

Many employees, already under the gun to save enough to pay for nonmedical expenses in retirement, are in even worse shape when anticipated future medical costs are factored in.

For example, nearly half (48%) of consumers believe that the total amount they’ll need to spend on healthcare in retirement won’t exceed $50,000. Moreover, only 15% of pre-retirees have even estimated the level of health care costs they will face in retirement. The average 65-year-old couple retiring today, meanwhile, can expect to need $220,000 to cover medical expenses, not including long-term care.

The findings come from research of 500 employers and 1,005 consumers conducted by Alegeus Technologies, the consumer health care funding platform, and a third-party research firm.

HSA misconceptions
The survey also revealed that consumers have a lot of misconceptions about health savings accounts. For example, 65% seem to confuse HSAs with health reimbursement accounts, believing that they would forfeit any un-spent HSA funds at the end of the year, as is the case with HRAs. That might not be surprising, because 71% of those polled “are not enrolled in any tax-advantaged benefit accounts,” according to Alegeus.

HSAs can only be offered in conjunction with a high deductible health plan. But the definition of “high” today isn’t very high – a deductible exceeding $1,300 for single coverage, and $2,600 for family coverage.

HSAs, Alegeus suggests, can serve as a very effective long-term saving and investment vehicle to help employees prepare for health costs in retirement. The key is for employees not to tap too deeply into their HSAs to pay for health costs prior to retirement.

HSAs are funded with pre-tax dollars, and aren’t taxed when used to pay medical expenses. That makes them superior to 401(k)s and IRAs, which are taxed at the back end.

Avoiding penalties
As with IRAs and 401(k)s, funds withdrawn too soon from HSAs (assuming it’s for a non-medical purpose) face a penalty tax – 20%, plus regular income tax. That penalty disappears after age 65. Unlike retirement accounts, HSAs have no minimum annual distribution requirements.

Today’s annual HSA contribution limits are $3,350 for employees with single coverage, and $6,650 for family coverage, suggesting that employees who save aggressively in HSAs can put a big dent in their future health cost needs.

That is rarely done, however. According to Employee Benefit Research Institute data, only 15% of HSA owners make the maximum annual contribution. Employees would be wise not to, however, if they had not already contributed up to the maximum amount in their 401(k) that is eligible for an employer match.