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EBRI: HSAs Won't Cover Retiree Health Costs

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Health savings accounts are likely to play a minor part in savings for health care costs in retirement, according to a new report.

The study by the Employee Benefit Research Institute, Washington, arrives at this conclusion because both statutory contribution limits and currently low interest rates constrain the amount HSAs can generate, compared with the large amount needed to pay for retiree health expenses.

HSAs are tax-exempt trusts or custodial accounts that individuals can use to pay for health care expenses.

EBRI’s report evaluates the use of HSAs to generate savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement. It used data on estimated Medicare payments along with earlier EBRI research on retiree health costs.

Based on current interest rates, if individuals age 55 in 2009 were to contribute $3,000 to their HSA and also contribute the $1,000 catch-up contribution each year for 10 years, $48,300 would be in the account after 10 years at a 2% interest rate, EBRI says. If the interest rate were 5%, $55,100 would be accumulated at the end of 10 years.

But the study concludes the savings levels are inadequate to cover health costs in retirement. The report finds that:

–A man age 55 in 2009 would need between $144,000 and $290,000 by the time he reached age 65 in 2019, depending upon his use of prescription drugs in retirement, to have a 50% chance of being able to cover premiums and out-of-pocket expenses for Medigap and Medicare Part D.

–A 55-year-old man would be able to use an HSA to accumulate between 16% and 32% of needed savings for insurance premiums and out-of-pocket expenses in retirement for a 50% chance of having enough savings.

–For a 90% chance, the maximum HSA savings would cover between 7% and 16% of the necessary savings amount. Women, who live longer than men on average, would need more.

“One of the difficulties in using an HSA to save money for premiums and out-of-pocket expenses during retirement is that contributions to the HSA are limited by law,” says Paul Fronstin of EBRI, author of the report. “As a result, the savings needed for retiree health care far exceed the savings potential of an HSA.”

The full report is online in the April 2010 edition of EBRI Notes.


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