And policymakers need to better understand the market.
Health Savings Accounts, or HSAs, are a relatively new type of account. The U.S. Congress created them in 2003, but it wasn’t until 2010 that more than 10% of the working population had access to them, according to research from the Kaiser Family Foundation. As a result, according to HSA consultancy Devenir, assets deposited in HSAs were only $37 billion at the end of 2016, an amount that pales in comparison to more-established tax-advantaged accounts, such as the $5 trillion deposited in 401(k)s and $8.1 trillion in IRAs.
Additionally, few workers use their HSAs as investments, leaving their HSA assets in checking accounts instead. That’s a problem because for workers who have sufficient savings and can pay for their health expenses with their HSAs or other savings, investing extra assets can be a powerful way to prepare for health expenses in retirement. We see widespread confusion due to a lack of guidance on how to best use HSAs. Further, many who want to invest find that their HSA fund lineups leave something to be desired.
HSAs Poised to Continue to Grow
Today, about 30% of workers have access to HSAs, and the accounts are well positioned to continue to grow. To have access to an HSA, a worker must be enrolled in a high-deductible health plan, or HDHP. Employers like these plans because they cost less to offer to their employees than traditional plans. In a survey of more than 800 employers, Aon, a benefits consultancy, found that 64% offered an HDHP as an insurance option, with an additional 22% indicating they were evaluating offering an HDHP in the next three to five years. Another 15% offered an HDHP as their only health insurance plan. Devenir similarly sees growth in the market and estimates total assets deposited in HSA accounts will rise to $53.2 billion at the end of 2018.
Recent legislative efforts will nudge even more workers into high-deductible health plans with HSAs. Both recent healthcare bills in the U.S. House of Representatives and Senate dramatically raised contribution limits on HSAs to as much as $13,600 for a worker using a family plan. Although the healthcare bills failed to pass, there is a strong push to expand HSAs that could also be part of a tax reform effort.
HSAs are a powerful tool that can enable accountholders to achieve a more secure retirement. They compare favorably to other tax-advantaged accounts in that they offer a triple tax advantage, as shown in the exhibit below. Contributions are on a pretax basis, investment returns grow tax-free, and withdrawals are tax-free for qualified medical expenditures.
Perhaps the best way to use an HSA, from a wealth-maximization perspective, is to pay for medical expenses incurred out of pocket and invest HSA funds, allowing them to grow tax-free over the course of a career. Of course, this is only true for workers who can pay for their out-of-pocket expenses with existing HSA balances and other savings.
Those lucky enough to be able to apply such a strategy can invest their HSAs for inevitable retirement medical expenses, including Medicare premiums. Fidelity estimated that a 65-yearold couple retiring today can expect to pay about $260,000 in healthcare costs in retirement, and even more if they wish to insure against long-term-care costs. Also, HSA accountholders can essentially reimburse themselves for past expenses. For example, if a patient pays out of pocket for an emergency room visit from savings other than her HSA investment account, she can withdraw that money 30 years later, after the principal has had ample time to compound.