Markets, Financial Planning, Retirement

HSAs: An Often Underutilized Investment Tool

11/21/18 8:00 AM

iStock-626627280.jpgLast month we looked at the latest increases in retirees’ medical expenses, but the rising cost of care is a concern for Americans of all ages. A recent analysis by the Employee Benefit Research Institute (EBRI), for instance, found that more than one in four (26 percent) surveyed U.S. workers ranked healthcare as “the most critical issue in the United States” at the moment, and just 30 percent said they are confident that over the next 10 years they will be able to pay their medical bills without experiencing a financial hardship. Further, 24 percent of respondents said that they have already decreased their contributions to retirement plans as a result of rising healthcare costs, and 17 percent reported that they have had to take a loan or withdrawal from a retirement plan to pay for medical services. Unsurprisingly, a resounding 73 percent of respondents said that health insurance is one of the top benefits they take into consideration when deciding “whether to stay in or choose a new job.”


Many employers, though, have started offering high-deductible health plans (HDHPs) in response to rising insurance outlays. The hope for these plans is that greater out-of-pocket spending will nudge workers into being more cost conscious when seeking care, but research on the effectiveness of this strategy has at best been mixed. On the bright side, one clear benefit of enrollment in a high-deductible plan is that it will typically make you eligible to participate in a health savings account (HSA). Indeed, as a quick review an HSA is a tax-exempt trust or custodial account that you set up with a qualified trustee to pay or reimburse certain medical expenses you incur. Contributions are deductible from taxable income, contributions can grow (from interest or other capital earnings) tax free, and withdrawals are tax exempt if used for qualified medical expenses. There are annual caps on what can be contributed to an HSA, which will likely be increased in 2019 due to recent inflation pressures. Congress this summer even explored doubling annual HSA limits, but only around one in eight account holders actually contribute the fully allowable amount each year.


That is disappointing because contributed funds roll over and accumulate year-to-year if they are not spent, therefore making HSAs a powerful tool for growing your savings. In fact, an earlier EBRI study 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. However, an updated EBRI report found that only 4 percent of HSA owners actually invest their money, while the rest simply leave their account balances in cash, thereby missing out on potential growth opportunities and tax savings. One reason this occurs is because many account owners treat HSAs as nothing more than specialized checking accounts used only to pay for deductibles, coinsurance, and other out-of-pocket healthcare costs. EBRI’s Paul Fronstin added that plan sponsors must educate workers about the “benefits of moving beyond cash when investing HSA assets,” and how “contributing closer to the maximum allowed by law will increase the likelihood of being able to cover uninsured medical expenses in the future.”




Post author: Charles Couch