Many schools, cities and counties offer early retirees the option to continue on their group health insurance plan. They may also consider using a High Deductible Health Plan with an HSA (Health Savings Account). However, using an HSA may be a mistake. Here’s why.
While HSA balances can be used into early retirement for eligible health care expenses like deductibles, co-pays, prescription drugs, eyeglasses, dental expenses and other medical expenses, there is one very important thing that it cannot be used for. The HSA cannot be used to reimburse medical insurance premiums prior to age 65. Given that many schools, cities and counties allow employees to retire early, prior to 65, and that retirees have access to more quality health plans than ever before, this is a major drawback.
A better option may be a funded HRA (Health Reimbursement Arrangement). An HRA is very similar to an HSA. Both plans allow employers to deposit funds on behalf of the participant. Both plans are designed so that funds carry over year-to-year. And both plans earn interest tax-free and are used tax-free for qualifying medical expenses. And while both cover eligible health care expenses, many schools, cities and counties across the country have found HRAs to be a better fit than HSAs for their employees due to the fact that the HRA can be used to reimburse retiree health insurance premiums. In fact, eligible HRA premium payments include health, dental, vision and long-term care insurance, as well as Medicare B, C, D and Medicare Supplements. The ability to use accumulated HRA funds tax-free for premiums once retired increases consumerism, bending the claims-related cost curve going forward.
To learn more about why an HRA may work better for you than an HSA, check out our white paper.