“Surveys showing low balances are merely a snapshot. When you see a picture of a friend on social media posed on the dock before embarking on a cruise and then see her picture posted on the same dock when she returned, you don’t assume that she never left port, do you?”
William G. (Bill) Stuart
Director of Strategy and Compliance
May 27, 2021
Health Savings Accounts continued to grow in 2020, with annual increases of 7% (to 30.2 million accounts), 25% in total assets ($82.2 billion), and 52% in invested balances (to $28.6 billion), according to the semi-annual Devenir Research report issued at the end of 2020. But could they have grown even faster, or experienced that impressive performance from a higher base of accounts and assets established in earlier years? [ ]
Of course, it’s impossible to tell. But we do know that a lack of knowledge and misconceptions probably have slowed Health Savings Account adopting and funding. Let’s look at some of these misconceptions and assess why they’re not accurate.
They’re Basically a Health FSA
No. At first glance, perhaps. The immediate tax savings are the same. Contributions aren’t included in taxable income and distribution for eligible expenses are tax-free as well. But beyond this measure, Health Savings Accounts enjoy many advantages over their older relative:
- No use-it-or-lose-it. Health Savings Accounts are a personal financial asset, not an annual reimbursement program. Owners never forfeit their balances. They maintain their funds and can use balances to reimburse eligible expenses tax-free for the rest of their lives. This feature makes Health Savings Accounts an ideal source of funding for medical emergencies.
- Flexible contributions. Health Savings Account owners determine when and how much (up to federal limits) they deposit into their accounts each year. They can increase or decrease their pre-tax payroll deductions during the year or make one-time contributions through payroll deposits or tax-deductible personal contributions. In contrast, Health FSA owners are locked into a binding annual election unless they experience a qualifying event.
- Because Health Savings Accounts are personal assets rather than an employer-sponsored plan, owners take their accounts with them as they leave employment. And they’re inheritable, allowing owners to leave a legacy that outlives them.
- Investment opportunities. Health Savings Account owners earn interest on their unused balances and can invest unspent funds in a variety of investment options.
Health FSAs present a great financial opportunity to participants. But they’re a time-bound reimbursement account and don’t provide an opportunity to accumulate funds – consciously (building balances for retirement medical expenses) or inadvertently (overfunding as expenses are less than projected) – for future purchases of eligible expenses.
They’re for the Wealthy Only
Not really. There’s an element of truth here, to the extent that all financial accounts benefit people with higher incomes or more disposable funds (whether through higher income or more frugal living). But in practice, the profile of Health Savings Account owners – age, income, general health – appears to mirror Health FSA owners. (I use the verb appears because we lack a comprehensive, scientific study across the bulk of accounts, though smaller studies by administrators of their clients confirm this general trend.)
Thus, it appears that the key determinant is availability. Employees choose the account – Health FSA or Health Savings Account – that their employer offers (or, when it offers both, often the lower-premium medical plan). In the nongroup market, only Health Savings Accounts are available, as an employer-sponsored Health FSA isn’t available absent an employer (although some employees who buy nongroup coverage with an employer-funded Individual-Coverage HRA may be offered a Health FSA by their company).
Most Owners Don’t Have Discretionary Income to Contribute
Yes, but that’s not the point. It’s certainly true that many Health Savings Account owners who don’t have family coverage don’ have an extra $7,200 (2021 figure) lying around to deposit into their account.
Here’s what is important: Average deductibles (+162%) have grown at more than six times wages (+26%) during the first two decades of this century, according to Kaiser Family Foundation. Among enrollees in employer-sponsored coverage, the average deductible is $1,655 for self-only coverage. Nearly half of employees who work at companies with 200 or fewer employees have a deductible of $2,000 or more.
The question isn’t whether employees have discretionary money to contribute to a Health Savings Account. They have medical, dental, and vision expenses for which they’re responsible. They need to find the funds to pay their providers. Where do they find $2,000 when they reach the deductible? I don’t know. But I know that when they find that money and run it through a Health Savings Account, they typically save $400 to $600 in taxes, thereby reducing the effect on their family budget to $1,400 to $1,600. That’s a meaningful difference that reduces some of the financial angst associated with owing money.
Low Balances Indicate Minimal Benefits
No. Surveys showing low balances are merely a snapshot. When you see a picture of a friend on social media posed on the dock before embarking on a cruise and then see her picture posted on the same dock when she returned, you don’t assume that she never left port, do you?
The semi-annual Devenir Research report on Health Savings Accounts is the best comprehensive source of information in the industry. The 2020 end-of-year report shows a total of 30.2 million accounts and balances of$82.2 billion. Simple math pegs the average balance at about $2,725
But a breakdown of accounts by balance range paints a different picture. Exactly 50% of accounts have a balance of $500 or less. The median – the point at which half the balances exceed and half fall below that amount – is $500. The mean is often the better measuring stick when a few outliers (in this case, the 2% of accounts with balances exceeding $25,000) skew the result.
At first glance, that figure might seem to reinforce the notion that most people derive little benefit from their accounts since they end the year with only a small balance. But the figure is misleading. What we don’t know is the level of annual funding of these accounts.
If the average Health FSA balance at the end of the plan year is, say, $10, would it be reasonable to conclude that participants derived little value from their account during the year? Or would you conclude that a vital piece of information is missing: how much they contributed (and thus by what amount they reduced their taxable income).
And so it is with Health Savings Accounts. What we do know is that 20% of account owners (with balances of zero at the end of 2020) have spent every dollar that they’ve contributed over the years (though we don’t know how much). Another 30% have spent up to $500 less than they’ve contributed during their years of ownership.
Let’s assume that the average person enrolled in HSA-qualified coverage (minimum deductible of $1,400 for self-only and $2,800 for family coverage) incurs $1,500 of out-of-pocket medical cost-sharing, dental, and vision expenses. By the way, here’s how that $1,500 assumption stacks up to the average deductible on a plan sold on federal- and state-facilitated marketplaces: less than one-third of the deductible on Gold coverage, less than one-third Silver, and much less than one-quarter on Bronze.
That family probably saves $400 in taxes on contributions of that amount to a Health Savings Account. Increase the out-of-pocket expenses to $2,000 and the savings fall into the $500 to $600 range. For an average family, savings of that magnitude are important – not life-altering, but important when it comes to sending a child to summer camp for a week or registering several kids in youth sports, and paying for footwear and uniforms. Or offsetting most of the cost of replacing a home’s water heater or four tires on the family SUV.
Don’t fall into the trap that accounts with little or no balances at a single point in time are proof positive that many people can’t afford to fund a Health Savings Account and therefore the program doesn’t benefit them. It’s simply not true.
Owners Forfeit Unused Balances
No. A Health FSA is an annual reimbursement program that requires a yearly binding election, with no opportunity to adjust the election as projected expenses (the source of the election) end up being higher or lower than actual. Health FSA participants who elect too much risk forfeiting unused balances, although employers can extend the time that employees have to spend their unused balances. Participants who elect too little don’t forfeit balances, but they lose the opportunity to pay for eligible expenses at a 25% to 35% discount. If they elect $1,000 too little, they lose perhaps $300 in potential tax savings.
In contrast, Health Savings Accounts aren’t time-bound. Think of your checking account. You don’t forfeit balances not spent by the end of the year. Calendar milestones mean nothing because you own your checking account balances and can spend them as you please, when you please, on what you please. The same holds true for Health Savings Account balances. Owners never have to scramble at the end of a plan year to spend balances to restock a first-aid kit or buy a backup to their backup pair of prescription sunglasses.
Owners Lose Access when They Switch Jobs
No. This is true for most Health FSA participants because that program is an employer-sponsored plan. In some limited cases, participants can continue coverage on their Health FSAs through COBRA, but it’s rare. In most cases, when the employment relationship is severed, so is access to the Health FSA election.
In contrast, Health Savings Accounts aren’t an employer-sponsored plan – even though the company provides the HSA-qualified medical plan and in most cases has chosen a preferred account provider. Health Savings Accounts are personal financial accounts that employees take with them from job to job, full-time to part-time work, or employment to retirement. Owners lose access only when they’ve exhausted their balances (and are no longer eligible to make additional deposits) or they die. And in the latter case, their beneficiary receives any unused balances.
The Bottom Line
Health Savings Accounts provide a level of flexibility and ownership that Health FSAs can’t match. Either is a good choice to help manage out-of-pocket medical, dental, vision, and over-the-counter expenses. People who have the option to enroll in HSA-qualified coverage and meet eligibility requirements should seriously consider opening and funding a Health Savings Account to pay for their current and future eligible expenses with discounts generated from tax savings.
What We’re Reading
Employees too often don’t think about the relationship between spending too much for medical coverage and care and funding their retirement. That’s a mistake, according to this paper published by Voya Financial. Employees need to link to maximize the spending power of their income now and in retirement.
Millions of Americans withdrew funds from their retirement accounts – in the form of either hardship withdrawals or loans – during the pandemic in 2020. Many will pay taxes and penalties as a result. If those who needed the money funded a Health Savings Account, they would have been better off financially. In this article, I explain how to prepare for the next financial shock.
Did you know that Benefit Strategies maintains a library of Health Savings Account information to help you remain in compliance with federal tax law? Here’s one piece that provides timely information on how much someone who becomes HSA-eligible July 1 can contribute to her account in 2021.