Health Savings Accounts grew to an estimated $51.4 billion in assets across more than 23 million accounts halfway through 2018, according to Minneapolis-based HSA research firm Devenir Group. By the end of 2020, Devenir projects the HSA market will approach $75 billion in assets covering more than 29 million accounts.
Nothing to sneeze at to be sure. But the same mid-2018 report also found most people who do have HSAs aren’t taking advantage of the account’s huge tax advantages and long-term benefits.
Through the first half of 2018, Devenir found HSA contributions totaled about $19.8 million, while withdrawals totaled over $13.7 million.
This demonstrates most people are still using their HSA primarily to pay for out-of-pocket medical costs, and still missing out on an HSA’s best feature: its unique triple tax advantage makes it a formidable retirement savings vehicle.
Contributions to an HSA are made pretax or are tax-deductible. Earnings and interest accumulate tax-free, and withdrawals for qualified medical expenses are tax-free.
The funds in the account roll over year to year, allowing growth over time. No other financial product (not even a 401k!) can do this, and it’s why more and more 401k advisors—not to mention plan sponsors and record keepers—are singing their praises in an ever-louder chorus.
In fact, a handful of large record keepers have rolled out the availability of HAS plans for their 401k plan clients within the past couple of years, including Empower Retirement, Fidelity Investments, and most recently Vanguard, which added HSAs in November 2018 through a partnership with leading HSA provider HealthEquity.
Will contribution limits be expanded?
HSAs have been around since 2004, but the Employee Benefit Research Institute (EBRI) reports that more than three-quarters of HSA accounts have been started since 2014. The growth is happening, but what is keeping HSAs from really taking off as the investment and retirement savings tool they have the potential to be? Consumer awareness for one and low annual contribution limits are another hurdle.
We’ll look at how 401k advisors can step up their HSA game in a minute, but first, let’s look into the contribution limits issue.
You may remember that the U.S. House of Representatives passed a pair of bills in July 2018 that would have practically doubled the annual limits on contributions to HSAs for those with employee-only health coverage from $3,450 to $6,550—and from $6,900 to $13,300 for those with family coverage.
But the bills died in the Senate, facing significant Democratic opposition because they were perceived as another effort to undermine the Affordable Care Act while allowing the wealthy another option to stash tax-free money, according to ranking member of the House Ways and Means Committee Rep. Richard Neal (D-Mass.).
That has left Americans with still-modest maximum annual HSA contribution limits (employer plus employee) for 2019 of $3,500 per individual and $7,000 for a family. An additional $1,000 in catch-up contributions is permitted for those age 55 and older.
Roy Ramthun, president and founder of HSA Consulting Services and also known as “Mr. HSA,” is projecting that contribution limits will once again see modest increases for 2020. Ramthun expects an individual limit of $3,550 and a family limit of $7,100—just $50 and $100 more than 2019.
It remains to be seen whether further legislation will be introduced during 2019’s 116th Congressional session to increase the amount of allowable contributions and make usage more flexible. The Senate remains in Republican control with 53 seats, but Republicans still face the challenge of attracting seven Democrats (or independents who caucus as Democrats) to bring the bill to the floor for a vote if the Democrats threaten a filibuster.
If Democrats stick to HSA expansion efforts as being attempts to undermine the ACA, any prospective bills introduced this year probably won’t pass. But if HAS expansion supporters are able to overcome that argument, the likelihood of such a bill becoming law increases dramatically. If that were to happen, as most advisors would like to see, HSA plans could truly turn into robust retirement savings vehicles.
But would a dramatic increase (potentially double) in limits really prompt significant additional funding into HSA accounts?
Using data from its HSA Database, EBRI found that while half of HSA owners contributed to their account in 2017, only 13 percent of account owners contributed the maximum.
Still, EBRI finds longer-tenured account holders tended to contribute more, and the longer they have an HSA, the more likely they are to contribute the maximum to it.
“The rise of HSAs is an encouraging sign for future financial wellness for individuals who have and contribute to HSAs,” says Paul Fronstin, Ph.D., director of the health research and education program at EBRI.
“Over time, balances increase, contributions increase, and the percentage of accounts investing rises.”
Fronstin says plan sponsors and administrators will need to support and educate account holders about tactics for self-funding uninsured medical expenses, including the benefits of moving beyond cash when investing HSA assets and explaining how contributing closer to the maximum allowed by law will increase the likelihood of being able to cover uninsured medical expenses in the future.
“With health care costs comprising such a large percentage of retirement expenses, the HSA should be viewed as an important retirement savings vehicle,” Fronstin says.
Plan participants need your help
How should 401k advisors who have not yet boarded the HSA train view this opportunity? It’s no wonder why an increasing number of advisors are eyeing them as a way to offer more services and provide more expertise to 401k clients—not to mention build their business. And its obvious consumers right now need all the advice they can get to help them get past thinking of an HSA as merely a good way to help pay current health care expenses and embrace its full potential as a retirement savings vehicle.
Even today there are still plenty of employers (and heads of HR) out there who are still somewhat unfamiliar with HSAs and how versatile they can be. And they might need a reminder that their employees could very well be terribly unprepared financially for retirement. HSAs can help them do something about it.
This is where you come in, because benefits brokers might talk about the basics of an HSA and their tax benefits during open enrollment, but they are not financial advisors and are generally not going to educate participants on just what it can do.
401k advisors are in a position to educate and boost enrollment.
First, it’s important to figure out whether the plan sponsor wants to position the HAS as a transactional account or an investment account—something often determined by industry and average salary levels of potential plan participants.
While most consumers still think of an HSA as an account where money is set aside to spend on health care expenses during the year, that perception needs to change. While there will be some blue-collar workers who are less likely to invest or fully contribute to HSAs (and will favor plans with low account maintenance fees), participants that can afford to turn HSAs from transactional accounts into investment accounts more like 401ks can accumulate savings quickly with the help of that triple tax advantage.
Investing in HSAs—especially with maximum contributions—can be a great way to save up for the very real possibility of significant medical costs in retirement.
Remember, a 65-year old couple leaving the workforce today can expect to need $260,000 to cover medical expenses during retirement. But of course, if the account holder is fortunate enough not to incur significant medical costs during retirement, the funds don’t have to be used for medical costs, can be withdrawn tax-free after age 65, and can even be distributed tax-free to a spouse if the account holder dies.
Not all HSAs allow participants to invest some or all of the account’s balance, but many do allow for a wide range of investment options, including mutual funds and ETFs, while others may have a very limited menu of options. Again, knowing the company and what type of employees will be important in figuring out what kind of options will be most appropriate.
HSAs are a great tool for participants and sponsors with their increased flexibility over healthcare spending and unmatched tax benefits that can make them a substantial supplemental retirement account.
401k advisors who are able to effectively demonstrate the unique capabilities of HSA plans have an opportunity to significantly boost plan participant and sponsor satisfaction.