With such a simple, descriptive name, health savings accounts would seemingly leave little room for confusion – you use them to save money for healthcare costs.
The HSA concept has proven anything but simple since the U.S. government introduced it in 2003 as a way for people with high-deductible health plans to put aside pretax money to cover immediate out-of-pocket medical expenses and build up an emergency account for long-term needs.
Though often confused with flexible spending accounts, HSAs are different because the money does not expire at the end of the year and the account stays with you even if you change jobs or retire. Participants choose a financial institution from a large roster to hold the account, and can allocate the money as they wish. Also, the contributions allowed are much greater – $6,450 per family versus $2,500 for FSAs.
HSAs have now amassed $18 billion in assets, according to the Employee Benefit Research Institute, a nonpartisan think tank. The number of new accounts rises steadily along with the popularity of the high-deductible health plans, which are now offered by 45 percent of companies, according to a study released last week by benefit consultant Aon Hewitt. Soon, millions more are expected to join in, as they pick HSA-eligible plans from the state insurance exchanges that are part of U.S. healthcare reform.
The Internal Revenue Service sets the rules as to which high-deductible health plans can work in conjunction with the health savings accounts, and determines the contribution limits each year. Many in the new “bronze” tier meet the criteria.
But for all of these people to benefit from the design of the plans, they have to know how to use them. And survey after survey shows that they do not. An August report from Fidelity Investments, for instance, found that 65 percent of workers do not understand the basic rules.
The upshot of this misunderstanding is that the majority of account holders are not using HSAs to save money and are missing out on the valuable perk of being able to spend pretax dollars on qualified expenses.
“If we can continue to educate, these accounts can be a great tool,” says Will Applegate, Fidelity’s vice president for HSA products.
The people who are deriving the least benefit from the accounts are those who spend everything they set aside. About 60 percent have less than $1,000 in their accounts, estimates Devenir, a Minneapolis-based financial services company that provides investment options for HSA accounts. About 11 percent of those people have a zero balance at any given point in the year.
Given that 69 percent of companies add to their workers’ accounts – averaging $886 per individual and $1,559 per family, according to the industry trade group America’s Health Insurance Plans (AHIP) – that means that some people are not contributing from their own paychecks. This is less than ideal because those people will not be prepared for unexpected expenses.
“They constantly have a need and they will not accumulate any balances,” says Eric Remjeske, Devenir’s president and co-founder.
The most apt comparison for HSA plans is to 401(k)s. What caused a surge in adoption and savings rates for retirement plans was automatic enrollment and automatic escalation of contribution rates. As Fidelity’s Applegate points out, HSA plans have automatic enrollment at many companies. The next hurdle, he says, is to persuade people to contribute more so they can set aside money for future costs. For a married couple that retires someday, those future costs could be more than $250,000, according to an estimate by Fidelity.
Fidelity has found that among its longer-term HSA account-holders, balances increase by about $1,100 each year. This suggests that people make better decisions once they become familiar with how HSAs work, says Applegate.
To save or to spend does not have to be an all-or-nothing proposition but some people take this equation to the other extreme and max out their contributions while taking nothing out for regular expenses. This is common enough that at HSA Bank, which has more than 500,000 accounts with $2 billion in assets, only 66 percent of people took a distribution in 2012.
For Brian Bly, a 47-year-old financial planner from Atlanta, the reason he maxes out his contributions and does not touch the money is that he wants to be ready for the day his healthcare expenses will be higher. “All the money we put there just stays there,” he says. “There may be a rainy day someday.”
The other behavior in need of change, according to industry analysts and providers, is how the money that is left over is invested. Of the 40 percent who are stashing away some cash, they do it very literally, by just leaving it sitting in bank accounts. In today’s low interest rate environment, that could cost them, as they are failing to keep pace with inflation and the rise of healthcare costs.
Of the total $19.3 billion expected to be held in HSA plans by the end of this year, only $2.3 billion is invested in mutual funds and similar instruments, according to Devenir. At two of the largest HSA providers, Fidelity and at HSA Bank, investors make up only 6 percent of the accounts.
Investment options run the gamut, depending on the financial institution holding the account. HSA Bank has no minimum amount for instance, and the money can go into mutual funds, ETFs and a slew of other choices. Some banks have a $2,000 minimum for starting a brokerage account.
The majority of people forego these choices, however, because the money is designated for emergencies and they want to keep it safe from risk.
“When they keep it in cash with us, it’s FDIC-insured,” says Mark Siebold, vice president of product management for HSA Bank. But if it goes out to a brokerage account, even just to a money market fund, you lose that safety.
“That’s a missed opportunity out there – absolutely,” says Fidelity’s Applegate.