Health Savings Accounts Protect Participant Investments
Health Savings Accounts (HSAs) provide the owners of those accounts with extensive investment flexibility. Health savings accounts afford workers another way to save for retirement beyond traditional workplace plans and individual retirement accounts (IRAs). But although health savings accounts have been around since 2003, most health savings account owners do not extensively inside of them. Or, Health Savings account owners fail to manage the money they set aside. Health savings accounts frequently do not get used in the most beneficial ways.
A recent article from BenefitsPro examined several reasons why health savings accounts are still so under-utilized despite their superior retirement savings benefits. They also offer a much-touted triple-tax advantage: contributions are made on a pre-tax basis, those contributions grow tax-free, and withdrawals aren’t taxed, provided the money is used for qualified medical expenses. Health savings accounts also offer workers the option to invest their savings, but few take advantage of that fact.
Surprisingly, financial advisors are not totally sold on health savings accounts, and neither are workers. But as BenefitsPro aptly observed, that could change as more workers and health savings account plan sponsors begin to better understand the long-term advantages of health savings accounts. Indeed, the Employee Benefit Research Institute (EBRI) found that the longer people have health savings accounts, the more they save in them.
Nonetheless, health savings accounts haven’t reached the peak of their usefulness in retirement planning, for the following reasons cited by BenefitsPro:
- Employers, especially those of low-income workers, are more apt to encourage their employees to spend down their assets on healthcare expenses rather than save the money for retirement.
- Users tend to use health savings accounts more like flexible savings accounts (FSAs). Many workers, and by extension, many employers, simply don’t understand health savings accounts as well as they could to use them to their full potential.
- Employees don’t invest in their 401(k)s because they fear doing a bad job. The same goes for investing in health savings accounts.
- Despite employers’ best efforts to educate, employees don’t always recognize the long-term benefits of health savings accounts. Many spend the money on near-term medical expenses rather than saving and investing in health savings accounts with a long-term goal like retirement in mind.
- The balances inside health savings accounts are rather meager. According to EBRI, “‘Between 2011 and 2018, end-of-year account balances increased but remained low — going from $1,990 in 2011 to $2,083 in $2018.’” That isn’t much to support rising healthcare expenses today, let alone in retirement.
- Employees aren’t maximizing their health savings account contributions. Again, according to EBRI data, from 2011 to 2018, contributions to health savings accounts were “‘just above the minimum allowable deductible amount for family coverage and less than one half the allowable contribution maximum for family coverage.”
- Most employees don’t use the investment component of health savings accounts — in 2018, just 6% of HSA account holders actually had investments outside of cash.
While health savings accounts have the potential to help workers save more for retirement, the reasons above preclude them from using this benefit to its maximum potential. Employers can help by educating employees on the benefits of health savings accounts. Such education might include fostering better understanding of how to optimize contributions and the investing functionality to improve workers’ overall retirement readiness.