Help employees choose the right benefits to manage health care costs in retirement
Here are four strategies employers can consider as they help employees navigate the benefits and planning landscape for the long term.
By Rob Grubka | May 28, 2019 at 10:06 AM
High health care costs during working years and in retirement can easily derail a financial plan. Employees need a long-term strategy. Fortunately, more and more employers are bolstering their benefits programs to help their employees build a stable financial future.
Increasingly, employers are offering products such as voluntary insurance benefits and health savings accounts (HSAs) that employees can combine to create comprehensive plans that meet their unique needs and goals. With the right plan in place, employees are better able to save consistently, cover unexpected expenses, protect and grow their savings and prepare for health care costs later in life.
The trend toward prioritizing employee wellness is only expected to grow. In a 2018 report by Willis Towers Watson, 92 percent of employers said voluntary benefits and services “will be at the forefront of their strategic thinking and important to their employee value proposition over the next three to five years.” That’s up from just 59 percent in 2013.
1. Encourage employees to look ahead, not just live in the moment
Many people, particularly younger employees, tend to focus on the present. They may not understand that an accident or injury can bring unexpected out-of-pocket costs, from lost wages to high deductibles to paying for help with their daily tasks as they heal. Further, they probably don’t have all the facts about the health care costs they are likely to face in retirement. The percentage of household budgets spent on health expenses is nearly three times as high for retirees on Medicare as it is for working households, rising to 14 percent from 5 percent, according to a Kaiser Family Foundation study.
Even before they get to retirement, more than 25 percent of people have withdrawn money meant for retirement, according to PWC’s 2018 Employee Financial Wellness Survey. More than four out of 10 people believe they’ll need an early withdrawal at some point, with 31 percent of boomers and 30 percent of millennials saying they anticipate needing the money to pay medical bills. That percentage drops somewhat—to 21 percent—for Gen Xers.
The point to emphasize is that the most dependable short- and long-term strategy for employees is to have a plan that covers all the bases with voluntary benefits and a tax-advantaged HSA, as well as a retirement savings plan
2. From saving to spending: The lifetime benefits of HSAs
The HSAs that go along with high-deductible health care plans were designed to offer maximum tax benefits. The money goes into employees’ accounts pre-tax, meaning there’s less of an impact on net pay and FICA withholding is lower. Once in the account, the money grows tax-free and can be withdrawn tax-free to cover qualified medical expenses, even for covering deductibles. Non-qualified expenses currently incur a 20 percent tax penalty.
After age 65 or when a person is Medicare-eligible, withdrawals for nonmedical expenses are no longer subject to the 20 percent penalty, although they are subject to income taxes.
What’s more, HSAs aren’t subject to “use-it-or-lose-it” like a flexible savings accounts where the employee has to spend their contributions by year-end. The money in your HSA can roll over year-to-year and continue to earn until you’re ready to use it.
3. Explain how voluntary benefits fill the “coverage gap” at every life stage
Employers should make sure their health insurance plan descriptions make it loud and clear that they won’t cover every expense that results from an illness or injury. Many people are shocked to learn of out-of-pocket expenses they never considered. A range of products, such as accident, critical illness/specified disease and hospital confinement indemnity insurances, are designed to help fill the “gaps.”
Be sure employees understand these voluntary benefits are flexible and can be used for more than out-of-pocket medical expenses, like for mortgage or rent, utility payments, travel, meal prep, dog walking, child care and any other needs that arise. By covering some of the daily living expenses, these benefits also help mitigate stress so employees can focus on getting well and returning to work, a win-win for employees and their employers.
Employers should work with their providers to demonstrate the relevance of voluntary benefits. The idea is to help employees consider their individual needs and the needs of their family.
Segmenting employees by career or life stage can be useful. Here are a few examples.
Protecting “adulting” independence
A person who is “adulting”—getting settled in a career or an apartment—may have financial limitations, from an entry-level salary to student loans. If they are injured in an accident or develop a serious illness, they can quickly be overwhelmed financially. They may not have saved enough to meet a big deductible or continue paying rent if they miss work.
While any of the voluntary benefits would be helpful, young adults might want to consider accident insurance and look for coverage that pays an additional benefit if they’re injured playing in a friendly pick-up game or an organized sport, like sliding into home during the company softball league championship.
“Balancing” between two worlds
For those in the “balancing” stage of life, between “adulting” and “planning” for retirement, family may be their biggest priority. They need to protect themselves, their spouse and children, and maybe even an aging parent. Whether they are a “weekend warrior” family or one with a history of diseases with a genetic component, there’s a lot to protect against. Employees at this stage might want to consider accident, critical illness or specified disease benefits. Any serious injury or illness puts the whole family under significant financial strain.
“Planning” for what comes next
Employees in the “planning” stage are often more receptive to voluntary benefits than their younger colleagues. They have likely seen family and friends struggle with the costs of a serious illness. They are also acutely aware they have less time to save for retirement and less time to make up for unexpected costs or premature withdrawals from their retirement accounts. Appropriate benefits might include critical illness/specified disease, hospital confinement indemnity and accident insurances, and, depending on the plan, might even cover the entire family.
In all of these cases, having to interrupt saving or dip into a retirement savings account could undermine the ability to meet the high cost of health care in retirement. Balances will be smaller, there will be less of an opportunity for the money to grow, and one emergency could be followed by another, making it more difficult to catch up.
4. The power is in the combination
Employers are making it a top priority to help their employees be more financially resilient now and future ready. To help employees protect themselves and their families, employers need to stress that the best strategy is to not just rely on one savings or financial protection option, but to have a financial plan with the right combination of voluntary benefits in conjunction with an HSA.
With many of the tools employees need at their fingertips at work, it’s easier than ever to include the tools to enroll in and manage their HSA and benefits plans through the workplace. Employees can be confident their employer has the information to research and choose the best products at favorable rates. Employees benefit further from employer contributions to retirement plans, and investment options for HSAs.
An unexpected illness and injury can impact the present and the future, particularly when it comes to saving for retirement and amassing the resources to pay for high health care costs during working years and in retirement. Good employers help their employees stay financially fit while they’re working and give them the tools to prepare for retirement and its high health care costs.