New Study Confirms What We Thought We Knew about HSAs

Health Savings Accounts continue to be an important financial ally for many Americans. A recent study confirms some important trends.

The Employee Benefit Research Institute (EBRI) has once again contributed to our understanding of Health Savings Accounts. In a recent survey of its HSA data base, EBRI identified five important trends in the market. They aren't really surprising to industry insiders, but they may be a revelation to employers considering whether to introduce, expand, or modify a Health Savings Account opportunity for employees.

Employer Contributions Generate Higher Balances

Employers aren't required to contribute to their employees' HSAs, but progressive companies carefully design a program to help employees understand their opportunity, enroll in the program, and manage their out-of-pocket expenses. The amount (how much of the out-of-pocket financial responsibility does it cover?) and timing (Up front? Periodically? A combination?) of the contribution are important variables in initial uptake and enrollee satisfaction.

Regardless of the specific design of a company's program, employer contributions serve two important purposes.

First, they signal a partnership between employer and worker in managing the cost of medical coverage and care. Every dollar of additional premium absorbed by the employer is a dollar of non-cash compensation that employees can't spend on other priorities. And additional out-of-pocket financial responsibility drains discretionary income. An HSA-qualified plan saves employers and employees on premiums, and an employer contribution helps offset plan cost-sharing.

Second, employer contributions incent eligible employees to open an HSA. After all, an employer contribution to an HSA can't be deposited into any vehicle other than an HSA. Employers who contribute are more likely to choose an HSA administrator partner and to send information on employees enrolled in the HSA-qualified plan to automate the process of setting up employees' accounts.

When employers deposit part or all of their contribution up-front, in most cases they help employees establish their HSAs. Establishing an account is important because only expenses incurred on or after the date that the HSA is established can be reimbursed tax-free. Once the account is open and employer contributions create a positive balance, employees are more likely to add to the balance by setting up pre-tax payroll deductions to fund the account.

Most Account Owners Distributed Funds in 2021

That more than half of all HSA owners withdrew balances in 2021 isn't surprising. Many physician visits, diagnostic tests, and treatments (including day surgery and inpatient care) for non-Covid-19-related care was delayed in 2020 as medical providers shifted to caring for Covid-19 patients and other patients and providers were reluctant to interact and risk contracting the virus. In 2021, these providers and patients returned to more normal patterns of care, with pent-up demand from 2020 in addition to regular volume in 2022.

What is surprising is that a large (not noted) percentage didn't. It's likely that more account owners realize the benefits of building their balances - either by increasing contributions or, in this case, reducing distributions - to reimburse future qualified expenses, including in retirement.

HSA Balances Increased in 2021 Despite Higher Withdrawals

Even with increased medical activity in 2021, balances grew in 2021. The summary of the survey doesn't offer reasons. Perhaps the effects of a global pandemic - including more than 1 million Americans dead and fear of long Covid and the costs of treating what may be a chronic condition - helped owners appreciate the importance of a Health Savings Account as an emergency medical fund. While the focus of many industry analysts - I plead guilty - is on the long-term benefits of funding an HSA, these accounts provide an immediate tax benefit as an account to pay unexpected medical costs. The best way to maximize spendable income when saving for a qualified medical expense is through an HSA.

Age and Tenure Correlate with Higher Balances

It should surprise no one that older account owners have higher balances and HSAs that have been opened longer similarly have higher balances and higher levels of investment. On average, according to Devenir's semiannual surveys of the market, average HSA balances grow annually by about $400 to $800 - a function of contributions that exceed distributions and investment growth (or decline, as in 2022).

The HSA that's been accumulating these positive balances for, say, a dozen years will have higher balances than one opened two years. Older owners are more likely to own older accounts. And older owners, as they begin to understand the cost of medical coverage and care in their approaching retirement (Fidelity pegged the figure at $315,000 of remaining lifetime expenses for a couple age 65 retiring in 2022), are more likely to increase contributions and limit distributions to build their balances.

Few HSA Owners Invest Their Balances

Various market surveys peg the percentage of Health Savings Accounts with invested balances at between about 8% and 12% of the nearly 34 million accounts. That means roughly 3 million accounts with balances invested in mutual funds, stocks, and other assets.

The low percentage in seen as a problem. In fact, one news source ran a headline criticizing 93% of HSA owners for not investing. But such criticism is off the mark, and the low percentage of invested balances can be explained by balances.

Although the average balance in an HSA was a little more than $2,900 (see page 5 here) in mid-2022 (per Devenir, a leading source of HSA market information), that average is misleading. About half of all accounts have balances of $500 or less. Only 39% and 27% respectively, have balances that meet the typical $1,000 or $2,000 cash threshold before an owner can begin to invest. In other words, that 8% to 12% figure is the numerator in an equation in which the practical denominator isn't 100%, but rather 39% or 27%. Assuming the mid-range - 10% of overall accounts with investments - the percent of accounts with investments in HSAs with adequate cash balances to invest jumps to 24% (balance of $1,000+) or 37% (balance of $2,000+).

This quick analysis changes the narrative. But it's still true that too few owners invest their balances. Do their HSAs not offer an investment feature? Do they not understand how to invest? Are they skittish about the market given its performance during 2022? These are all valid reasons, but they lead to very different approaches to increasing investment.

Investing is an important activity in any environment, but particularly with the inflation of the past two years. It's almost impossible for an HSA owner to generate a return exceeding 2% through simple interest or a certificate of deposit. Investments offer the potential to increase balances long-term to counter the effects of inflation and build balances to cover retirement medical expenses. Those costs can be daunting, as Fidelity projects that a 65-year-old couple retiring in 2022 will spend an additional $315,000 for medical coverage (premiums) and costs (out-of-pocket expenses, plus services not covered by Medicare) during their remaining years.

The Bottom Line

EBRI, as always, has provided good insight into the behavior of Health Savings Account owners. These insights are important to both employers who offer HSA programs and administrators who manage these accounts. Both employers and administrators want to help employees use their accounts optimally. EBRI has confirmed some behavior and identified other opportunities for further education or other action.

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