Financial Planning, Retirement, Economy

Health Savings Accounts Continue To Grow In Popularity

11/8/16 8:00 AM

iStock_74188183_SMALLcropped.jpgInflationary pressures in America have firmed recently, and healthcare expenses have been one of the main drivers. For example, the latest data from the Bureau of Labor Statistics (BLS) showed that core consumer prices, which exclude volatile food and energy costs, have risen by 2.2 percent over the past twelve months. During this same period, the Bureau’s measure of medical care expenses has surged by 4.9 percent, the highest pace of annual growth recorded since the start of the “Great Recession.”

The Affordable Care Act (ACA) has likely played a role in the recent uptick in medical costs because the healthcare law greatly lowered the uninsured rate in America, thereby enabling more people (including "costlier" individuals with pre-existing conditions) to seek both emergency and preventative medical services. Care providers have naturally responded to the sudden jump in demand for such services by raising prices, and insurers have also taken notice. Evidence of the latter can be seen in the 25 percent average spike in the monthly insurance premiums for popular plans on next year, according to new government data.

Regardless of why medical costs are rising, it seems prudent to assume that paying for care is only going to get more expensive. One way to help deal with this particular type of inflation is to utilize a health savings account (HSA). Indeed, the Internal Revenue Service (IRS) defines an HSA as a tax-advantaged trust or custodial account that is set up with a qualified HSA trustee to pay or reimburse certain medical expenses. The main tax benefits of HSAs are that contributions are deductible from taxable income, contributions can grow (from interest or other capital earnings) tax free, and withdrawals are tax exempt as well as long as for qualified medical expenses. As a result, HSAs encourage setting aside money for the future and help people avoid having to dip into their long-term retirement savings in the event of an unforeseen medical expense.

In order to take advantage of an HSA, individuals must be covered under a high-deductible health plan (HDHP), which rising medical costs and the ACA’s Cadillac tax have forced many employers to use or at least consider. There are annual limits to what can be contributed to an HSA but the funds roll over and accumulate year-to-year if they are not spent. An analysis by the Employee Benefits Research Institute (EBRI) estimated that an individual who saves in an HSA for just 10 years could accumulate between $53,000 and $68,000, depending on the rate of return realized and on the contribution rates assumed, and as much as $1.1 million over a 40-year horizon. Such savings could be especially beneficial for older Americans, who are more likely to require medical care on a yearly basis. In fact, Fidelity Investments estimated that a 65-year-old couple retiring this year will need $260,000 to cover their likely healthcare needs and another $130,000 for long-term care expenses.

Unsurprisingly, HSAs have become quite popular in recent years. Roughly 18.2 million HSAs, for instance, were opened as of this past June, according to Devenir Research, up 25 percent from a year earlier. By the end of 2018, Devenir projects that the HSA market will exceed $50 billion in assets covering over 27 million accounts. Similarly, another new report from Fidelity Investments showed that the number of HSAs it provided grew by 43 percent in just the past year, with an increasing percentage of people investing their HSA funds to grow their account. Fidelity’s Jeanne Thompson added that “health savings accounts are a great tool to help employees meet their current and future healthcare costs, which can improve their financial well-being and lead to more productive workers.”



Sources: U.S. DoL, BLS, Gallup, KHN, Washington Post, CNBC, Devenir, SHRM, EBRI, Fidelity Investments, et al

Post author: Charles Couch