Helping a client’s employees get full value from their HSA accounts

Helping a client’s employees get full value from their HSA accounts

Health Savings Accounts (HSAs) are skyrocketing in popularity as premium increases have become the new normal in this uncertain market. In fact, recent reports project 30 million accounts, with assets exceeding $60 billion, by the end of 2019[1]. To put those numbers into perspective, there were around 6 million accounts in 2008[2].

HSAs also remain popular because consumers are looking for more choices and more ways to save. For example, HSAs offer triple tax savings. This means any HSA contributions can be made either pre-tax or are tax deductible at year-end. Any interest income or earnings on investments tied to an HSA remains tax free. Lastly, as long as the HSA funds are used to pay for qualified health care expenses then no taxes will be charged on distributions.

Additional benefits of the HSA include:

  • 100% of unused funds roll over year-after-year
  • Funds go with you even if you switch employers
  • Can pay for the eligible expenses of your legal spouse and tax dependents regardless of their insurance
  • Can be used for Medicare premiums as well as qualified long-term care premiums 

“Hidden” benefits of the HSA:

An often-overlooked benefit of the HSA is its function as an investment tool. HSAs provide more benefits than the traditional Investment Retirement Account (IRA) and can be invested into bank accounts, stocks, bonds, money market funds and mutual funds. Rather than using the HSA solely to pay for medical expenses, participants have the flexibility to choose when and when not to use their HSA dollars. By paying for qualified medical expenses with after-tax dollars, the HSA balance grows tax-free. Many HSA participants elect to pay smaller expenses with after-tax dollars, allowing their balances to grow for the future.

Let’s say a participant is in the 25% tax bracket and contributes the maximum family contribution to an HSA (currently $6,850) for 30 years with a 4% annual return. They would have nearly $400,000 at the end of this period. They could use that money to cover healthcare costs in retirement; and beginning at age 65, the distributions from the account are tax-free if used for qualified medical expenses. If funds are used for non-qualified expenses, the distribution becomes taxable, but exempt from the 20% penalty.

In contrast, if a participant used their HSA assets to pay for out-of-pocket healthcare expenses and diverted investments to a taxable account, their assets would not compound at the same rate and they wouldn’t receive the favorable tax breaks offered through the HSA.

Keep expectations realistic and invest wisely

It’s important for participants to understand the best way to use the HSA is by treating it as an investment tool, primarily because of the triple-tax advantage. In 2016, 4% of accounts had investments other than cash[3]. It goes without saying this understanding won’t occur overnight. It’s also unreasonable to expect every participant to have the wherewithal to use their account solely for investing. However, by educating participants and employers on the long-term value of the HSA, it’s realistic to expect a behavioral shift and an uptick in participants using the HSA as an investment tool. Participants need to look to their financial advisors when planning their HSA investment strategy, much like they would with a 401(k) or IRA. But in the end, the choice belongs to the participant.

You can also read this article on Employee Benefit Adviser