Financial Planning, Retirement

More Americans Are Utilizing Health Savings Accounts

9/17/20 12:00 PM

In June we explained why 2020’s sharp drop in healthcare spending has mainly been due to the coronavirus and related lockdowns, which have dramatically altered the way many Americans seek medical care. Some of the changes may be permanent, such as an increased reliance on telemedicine, but most of the disruptions should prove transitory, in turn meaning the cost of care could resume its march higher in the years ahead. Since healthcare outlays can already be substantial such expenses (and potential growth) should be integrated into everyone’s long-term financial plan.

However, non-retired Americans also need medical care, and unsurprisingly health insurance is among U.S. workers’ most highly-valued employer-provided benefits, according to an earlier (pre-COVID) EBRI poll. A separate analysis similarly found that more than one in four surveyed workers ranked healthcare as “the most critical issue in the United States,” and not even a third of respondents could say they are confident that over the next decade they will be able to pay their medical bills without experiencing a financial hardship. Many employers have started offering high-deductible health plans (HDHPs) in response to rising insurance outlays. In fact, 45 percent of private-sector employers offered an HDHP in 2018, according to the most current U.S. Labor Department data, nearly double the 2010 level.

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 greater enrollment in high-deductible plans is that it will typically make people eligible to participate in a health savings account (HSA). Indeed, as a quick review HSAs are tax-exempt trusts or custodial accounts 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. The funds roll over and accumulate year-to-year if not spent, in turn making HSAs another powerful savings vehicle for Americans.

The number of people taking advantage of HSAs has surged in recent years, growing from only 4.9 million in 2009 to 29.3 million at the end of H1 2020, according to a new Devenir report. The main driver of the multiyear uptrend has been broad economic growth in the United States, i.e. more Americans with jobs and enough disposable income to utilize HSAs. However, just in the past twelve months the number of HSAs has jumped by 12 percent. This latest acceleration in growth is likely a side effect of many people realizing that expensive health risks exist that they may have never even considered, such as a highly infectious disease originating on the other side of the planet. Regardless, a new Fidelity Investments analysis found that the vast majority (89 percent) of employees who have utilized an HSA said that doing so has had a positive impact on their lives.

There is still room for improvement, though, because very few participants actually contribute the maximum to their HSA each year, and many account owners treat HSAs more like specialized checking accounts than investment vehicles. For example, another EBRI study found that only 6 percent of HSA owners actually invest their funds, while the rest simply leave their account balances in cash, thereby missing out on potential growth opportunities and tax savings. Moreover, the Devenir study calculated that the average total balance (deposits and investments combined) for HSA holders who invest their assets was over five times larger than for non-investing HSA holders, and just like with 401(k)s and IRAs, HSA holders clearly benefit from consistent participation.



Sources: EBRI, Devenir, U.S. IRS, U.S. DoL, Fidelity Investments

Post author: Charles Couch