Accounting

HSA study examines how much health care costs in retirement

Published

2 months ago

February 10, 2025

The goal of amassing $1 million in a health savings account by retirement will elude the vast majority of clients, but financial advisors could still put these optimistic projections to good use.

HSA holders would need to contribute the maximum legal amount each year, including catch-ups, for four decades, avoid any distributions until they’re 65 years old and net a healthy rate of return of 7.5%, according to a study released last month by the Employee Benefit Research Institute, an industry research organization. Those rosy assumptions won’t reflect the reality for most HSA savers. However, advisors can nevertheless nudge clients toward saving in their HSA with a wealth of statistical estimates showing their massive health care needs in retirement and the corresponding potential of the accounts as a savings vehicle, experts said.

To have a “high chance” of covering their medical expenses during their retirement, a 65-year-old couple must plan for $351,000 worth of Medicare premiums, deductibles and prescription drugs, according to the Institute’s calculations. To boost the likelihood above 90%, that savings number grows closer to $400,000, said Jake Spiegel, a research associate with the organization and co-author of a larger report from the institute and health, wealth, retirement and employee benefits firm Inspira Financial last year that crunched the overall figures.

“After 40 years, you can end up with a significant chunk of change,” Spiegel said. “HSAs could actually be pretty well positioned to help people to, one, save for retirement and, two, pay for medical expenditures in retirement which can be pretty significant.”

Those expenses can mount well before retirement, too. As advisors encourage clients to set aside the current maximum of $4,300 in 2025, take advantage of any employers’ matching contributions and tap into the pretax savings, untaxed accumulation and tax-free withdrawals for qualifying medical costs, they should also remind them of the potential challenges, said Sarin Barsoumian, founder of Burlington, Massachusetts-based SMB Financial Strategies. Those include a huge potential tax hit to non-spouse heirs receiving any leftover assets after the clients’ deaths and shortcomings in the investment menus and interest yields of many HSAs.

“Many clients use HSA funds for current medical expenses, but if they can afford to pay out-of-pocket, they should let the HSA grow tax-free for retirement. If they have a sufficient emergency fund and can cover medical costs without touching the HSA, they should consider investing the balance in a diversified portfolio,” Barsoumian said in an email. “If clients withdraw funds for non-medical expenses before age 65, they’ll owe income tax plus a 20% penalty — a much harsher penalty than early withdrawals from a traditional IRA or 401(k), which are just subject to income tax plus a 10% penalty. After age 65, non-medical withdrawals are taxed like a traditional IRA, but there’s no penalty — so it’s not as flexible as a Roth IRA for tax-free withdrawals.”

Here are some of the most interesting takeaways from the EBRI research paper:

Medicare paid for 61% of health care costs in retirement in 2021, with private insurance covering 18% and consumers paying out of their pocket for 12% of the expenses.

A 65-year-old man using a Medigap plan that adds supplemental private health insurance for costs that aren’t paid for by Medicare should expect to pay $184,000 for medical care in retirement, while a woman of the same age needs $217,000 and a couple should anticipate expenses of $351,000.

Assuming the clients save the maximum each year in their HSAs and tack on $1,000 more in the permitted “catch-up” contribution years between ages 55 and 64 without withdrawing anything from the accounts, a 7.5% annual return on their assets would yield a nest egg of $78,000 in only 10 years. A 5% rate would add up to $68,000, and a 2.5% return would amass $59,000.

With the same assumptions, the HSA balances would reach: 20-year totals of $120,000 (2.5% returns), $157,000 (5%) or $208,000 (7.5%); 30-year totals of $198,000 (2.5%), $303,000 (5%) or $476,000 (7.5%); or 40-year totals of $298,000 (2.5%), $540,000 (5%) or $1,029,000 (7.5%).

Under less optimistic calculations that still incorporate a 7.5% return but assume the client withdraws half of the deductible amount from their HSA each year, the account would still have $56,000 after 10 years, $139,000 after 20 years, $311,000 after 30 years and $665,000 after 40.

In terms of tax savings on their contribution, higher income HSA holders net $13,000 in lower payments to Uncle Sam over a decade, $24,000 over two decades, $34,000 over three and $45,000 over four. In terms of their savings on yields of 7.5%, they would avoid another $7,000 in taxes during the first 10 years, $29,000 over 20, $87,000 over 30 and $217,000 over 40.

The numbers shift significantly based on any number of factors, such as when a client opens an HSA and how long they are contributing to it, their tax bracket and the extent that they do spend the money on health costs before retirement.
“Past EBRI research has found that the longer someone has owned their HSA, the larger their balance tends to be, because the higher their contributions tend to be, and the more likely they are to invest their HSA in assets other than cash,” Spiegel and the co-author, Paul Fronstin, wrote in the report. “These strategies better position accountholders to withdraw larger sums when unexpected major health expenses occur and can leave accountholders more prepared to cover their sizable health care expenses in retirement.”

For advisors and their clients, the problem is “that does not appear to be a strategy that is widely deployed right now,” Spiegel noted, citing another finding from the institute’s research that only 13% of HSAs have invested assets in something other than cash.

“That number has been trending up every year that we’ve done our analyses,” he said. “It’s still nowhere near what you might expect it to be, given the enormous tax advantages that HSAs offer and the really unique position they offer as a triple-tax-advantaged vehicle.”

Accounting

IAASB tweaks standards on working with outside experts

Published

21 hours ago

April 25, 2025

Business Finance News

The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

ISA 620, Using the Work of an Auditor’s Expert;
ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.

Accounting

Tariffs will hit low-income Americans harder than richest, report says

Published

21 hours ago

April 25, 2025

Business Finance News

President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings.

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed.

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

Accounting

At Schellman, AI reshapes a firm’s staffing needs

Published

22 hours ago

April 25, 2025

Business Finance News

Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition.

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time.

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said.

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load.

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai.

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies.

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area.

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai.

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales.

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai.

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves.

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”