While retired workers have a number of costs to contend with during their golden years, there's perhaps none more daunting than healthcare. And business owners concur. In fact, 55% of business owners consider healthcare to be the biggest expense looming for retirees, according to a new report from the Nationwide Retirement Institute, edging out housing, taxes, food, and transportation.

But surprisingly, only 20% of business owners fully understand why health savings accounts (HSAs) are so important, or how these plans even work. Furthermore, only 41% of business owners offer an HSA to their employees.

A doctor holds a stethoscope over the chest of an older male patient.


If you're in the dark about HSAs, it pays to learn more about this crucial savings option. It could be just the thing that gives your employees some peace of mind and helps you retain key talent in the process.

How health savings accounts work

An HSA is a tax-advantaged savings and investment account designed to help workers sock away funds for medical expenses that come up in the near term as well as the future. To qualify for an HSA, workers must have a high-deductible plan. That means an annual out-of-pocket deductible of $1,350 for single coverage, or $2,700 for family coverage. Additionally, workers must have a health plan that conforms to out-of-pocket maximums below a certain threshold. This year, that maximum can't exceed $6,750 for individual coverage, or $13,500 for family coverage.

The benefit of saving in an HSA is that contributions are tax-deductible, and withdrawals for qualified health-related expenses are taken tax-free as well. These expenses include things like prescriptions, medical office copays, eyeglasses, and health-related supplies and equipment. Furthermore, those contributions can be invested for further growth, and that money gets to grow on a tax-deferred basis so you're not paying taxes on your HSA gains year after year.

For the current year, HSA participants can contribute up to $3,500 for individual coverage and $7,000 for family coverage. Workers who are 55 or older can also make an additional $1,000 catch-up contribution. And as an employer, you're allowed to contribute toward your workers' HSAs, though your contributions will count toward the annual limits (which can change from year to year).

Health savings accounts vs. flexible spending accounts

Some folks tend to confuse health savings accounts with flexible spending accounts (FSAs), but the two are very different. Though both are funded with pre-tax dollars, FSAs don't allow workers to invest their money like HSAs do. Furthermore, FSAs are designed as a short-term savings tool, so much so that workers must use their funds within a limited timeframe or risk losing them. HSAs, on the other hand, actually encourage long-term savings. In fact, HSAs are a useful retirement savings tool for this reason: Employees can accumulate funds while working and then use that money during retirement to tackle the monstrous expense that is healthcare.

HSAs are an unquestionably valuable savings tool for folks who qualify. If your company doesn't offer an HSA, it's time to consider adding one to your list of workplace benefits. Your employees will thank you for it.