Providers of health savings accounts need to up their game, according to our study.
By Leo Acheson, Jake Spiegel, and Heather Larsen
When it comes to health savings accounts, or HSAs, investors have had few resources available to help them navigate hundreds of plan providers. This lack of information has likely contributed to their underuse as a savings vehicle despite their valuable tax benefits.
For the first time, Morningstar conducted an in-depth analysis of HSAs to provide a comprehensive resource for investors and employers selecting a plan. We evaluated 10 of the largest HSA plan providers in this report through two lenses: as spending vehicles to cover current medical costs and as investment vehicles to save for future medical expenses.
Our takeaway: Out of the 10 plans we evaluated, only one looks compelling for use as both a spending vehicle and an investment vehicle, suggesting there is much room for improvement across the industry.
How We Assessed the Plans
HSAs are offered in conjunction with high-deductible health plans. They are tax-sheltered accounts for individuals to save for medical expenses that aren’t covered by the health plan. Interest in HSAs is rising, but they remain a very underresearched corner of the market.
An HSA is triple tax-advantaged: Pretax dollars go into the HSA; the money grows on a tax-free basis; and withdrawals are tax-free as long as the money is used to cover qualified healthcare expenditures.
There are two compelling cases for people to use HSAs. First, investors can use them as a spending vehicle, depositing money into a checking account to use for near-term healthcare expenses. Because contributions and withdrawals for qualified medical expenditures are tax-free, workers can increase the buying power of their healthcare dollars. This is particularly beneficial for workers with limited resources.
Second, HSAs can be used as investment vehicles to save for future medical expenses. Fidelity estimates that retired couples can expect to pay more than $260,000 on healthcare in retirement. Considering that HSAs feature tax-exempt investment growth and interest, it would be optimal from a wealth-building standpoint for individuals to invest their HSA funds, pay for medical expenditures out of pocket, allow their investments to grow tax-free for many years, and “reimburse” themselves for their medical expenses many years later. Funds from HSAs can be used to pay Medicare premiums, for example, and HSAs can be used to fund long-term end-of-life care.