While HSAs offer a valuable tax incentive to save for future retirement health care expenses, account owners still appear to be using the accounts primarily to cover current expenses, according to a new study by EBRI.
Trends in Health Savings Account Balances, Contributions, Distributions, and Investments and the Impact of COVID-19 finds that very few account owners invest their HSA balance in investments other than cash. Only 9% of accounts in 2020 were investing, which is up from 2% in 2011. The longer an account had been open, the more likely it was to have investments, the study found. Only 4% of accounts open for one year had investments, compared with 13% of accounts open for 10 years.
Moreover, when accounts are invested, the majority of account assets are invested. Among accounts opened with investments, 74% of the balances were invested; among accounts open for 10 years, 77% of the balances were invested.
The initially low rate of investing may be because most HSA providers require account balances to reach a minimum threshold—often $1,000 to $1,500—before the account can be invested and it may take more than a year for the average participant to reach that threshold, EBRI notes.
Other reasons the percentage of accounts with investments may be low could include that account owners are not aware of the option to invest, or they may be using the account only to pay for out-of-pocket expenses and may not want to take short-run risks with investment fluctuations. They may also be trying to build up an account balance large enough to cover their deductible before investing, EBRI further observes.
COVID Declines?
EBRI also found that HSA distributions and contributions declined in 2020, possibly linked to the pandemic. According to the study, between 2019 and 2020, HSA balances increased modestly by $400, as average annual individual contributions fell 2%.
In fact, average annual individual contributions fell in 2020 after reaching an all-time high in 2019, going from $2,041 to $1,995. The percentage of individuals contributing to their HSA was flat between 2017 and 2020, at 50%. The percentage with employer contributions trended down over that period, from 51% in 2017 to 44% in 2020. Additionally, the study found that average annual distributions declined to an all-time low of $1,700.
The study suggests that lower HSA contributions could be tied to employment concerns related to the COVID-19 pandemic, while distribution declines could be due to fewer people seeking routine medical care during the pandemic. Additional key findings indicated:
- Modest balances. Between 2011 and 2020, end-of-year account balances increased but remained low, from $1,990 to $3,622. Accounts open for one year ended 2020 with an average balance of $1,728, while those open for 10 years ended 2020 with an average balance of $9,469.
- Contributions below the maximum. Average total contributions—combined individual and employer contributions—increased, yet the average was just above the minimum allowable deductible amount for family coverage and less than one-half of the allowable contribution maximum for family coverage.
- High incidence of withdrawals. Overall, nearly 60% of accountholders withdrew funds, which has held steady since 2018.
“As individuals become more familiar with HSAs, they are using the accounts more as designed,” notes Paul Fronstin, EBRI’s Director of Health Research and Education. “Account balances are growing over time, enabling longtime accountholders to withdraw larger sums when unexpected major health expenses occur. Plan sponsors that value employee financial wellness can work with administrators and advisors to better educate employees on the use of HSAs, including available investments.”
EBRI’s issue brief is the fifth in a series of longitudinal studies from the organization’s HSA database, which contains 11.4 million accounts with total assets of nearly $33 billion as of Dec. 31, 2020.
