Health Savings Accounts, or HSAs, are hardly a new thing – they were approved by Congress in 2003 and became law in January 2004. But they are getting a lot of attention lately – here’s why.
People are worried about health expenses – now.
People stay at – and change – jobs because of health care. Oh, retirement plans matter, and though matching and profit-sharing contributions have an influence, and vesting schedules have been known to make a difference in retention, health insurance is an issue that candidates are likely to broach in the interview, whereas retirement programs are more likely to be on HR’s list of things to mention.
Oh, and when I say “people,” I also mean plan sponsors. See, you may go a number of years without a hard look at your current 401(k) provider, a decade without actually making a change, and even though you are a plan fiduciary with personal liability for the decisions you are (not) making, nobody thinks much of it. But evaluating health care programs, providers and options has long been an annual undertaking by employers – and one in which workers, however ill-equipped they may be to do so, also have to focus long enough to choose their health coverage options.
All of that means that people are thinking about health care and health expenses every year, with a “here and now” attention that most retirement programs can only dream about.
Employer use of HSAs is growing.
In nearly every year since 1998, premium increases have exceeded worker-earnings increases and inflation, and health insurance premiums have nearly tripled, while worker earnings have increased just 58% during that period, according to the nonpartisan Employee Benefit Research Institute (EBRI).
In response, employers have been seeking ways to manage health care cost increases. During the past decade, employers have turned their attention to consumer-driven health plans (CDHPs) – a combination of health coverage with high deductibles (at least $1,300 for individual coverage in 2016) and tax-preferred savings or spending accounts that workers and their families can use to pay their out-of-pocket health care expenses. A recent report by EBRI cites a recent survey by Mercer that found that 25% of employers with 10-499 employees and 61% of employers with 500 or more employees offered an HSA-eligible health plan or HRA in 2016, while by 2019, 34% of employers with 10-499 employees and nearly three-fourths (72%) of employers with 500 or more employees say they are very likely to offer such a health plan. Indeed, is expected that 18% of employers with 500 or more workers will offer an HSA-eligible health plan or HRA as the only plan option by 2017.
Similarly, new survey data from United Benefit Advisors finds that an HSA is offered in a quarter (24.6%) of plans, a 21.8% increase from five years ago. The report notes that HSA enrollment stands at 17%, up 25.9% from 2015 — and nearly 140% from five years ago.
Employer contributions to HSAs are (also) growing.
A new EBRI report notes that 14% of privately insured adults were enrolled in a CDHP – a health plan associated with a health savings account or health reimbursement arrangement (HRA). More than half (56%) of CDHP enrollees opened an HSA, taking advantage of growing employer contributions. It was more common for employers to contribute to an HSA in 2016 than in the past, and the dollar amount also increased. Seventy-eight percent of CDHP enrollees reported that their employer contributed to the account in 2016, up from 67% in 2014. Furthermore, 20% of CDHP enrollees reported an employer contribution of at least $2,000 in 2016, up from 10% in 2014. Similarly, 42% reported an employer contribution of $1,000-$1,999 in 2016, up from 36% in 2014.
The average employer contribution to an HSA is $474 for a single employee (down 3.5% from 2015 and 17.6% from five years ago) and $801 for a family (down 9.2% from last year and 13.7% from five years ago).
People are worried about retirement health expenses – now.
According to the ConnectYourCare Consumer-Driven Health Plan Enrollment & Usage Trends Survey, more than 40% of the HSA participants interviewed said they enrolled in their HSAs in order to use the accounts as savings vehicles for future health care needs. That topped “tax savings,” which 21% selected, and “lower premiums” offered by high-deductible health plans, named by 9.5% of survey respondents. The survey also asked more than 14,000 workers what their primary concern is when it comes to retirement; nearly two-thirds (63%) selected health care expenses (such as insurance premiums, prescription costs and other medical expenses) over lifestyle expenses (paying for housing, vehicles, vacations, etc.).
And little wonder – Fidelity’s Retiree Health Care Cost Estimate recently said that a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs in retirement, a 6% increase over last year’s estimate of $245,000 and the highest estimate since calculations began in 2002. Similarly, in October 2015, EBRI estimated that a 65-year-old man needs $68,000 in savings and a 65-year-old woman needs $89,000 if each has a goal of having a 50% chance of having enough money saved to cover health care expenses in retirement. If either instead wants a 90% chance of having enough savings, $124,000 is needed for a man and $140,000 is needed for a woman, though that analysis did not factor in the savings needed to cover long-term care expenses.
HSA investments are expanding as well.
Another report by EBRI noted that while only about 3% of HSAs had invested assets (beyond cash), more than a third (36%) of HSAs with invested assets ended 2015 with a balance of $10,000 or more, compared with just 4% of HSAs without invested assets.
Don’t forget – HSAs have a triple-tax advantage.
Employee contributions to HSAs reduce taxable income – just like 401(k)s. The earnings on those contributions build up tax free – just like 401(k)s. But there’s one way in which HSAs are different from, and “better” than, 401(k)s – and that is that distributions from HSAs, so long as they are spent on “qualified expenses,” are tax free. Because of this, an HSA could prove to be more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan.
HSAs are likely to get even ‘better.’
Legislation has already been introduced in the both the U.S. Senate and House that is designed to give HSAs a boost, including nearly doubling the current HSA limits to $13,100 for a household with family health insurance coverage (with a $2,000 catch-up contribution for households age 55 or older), for a maximum annual contribution of $15,100. The bill also broadens how households can use their HSA dollars for purchases of over-the-counter medications and for paying health insurance premiums in addition to prescription drugs, co-pays, deductibles and other out-of-pocket health care expenses.
Even before that, the Health Savings Act of 2017 (S. 403) was introduced Feb. 15 in the Senate by Finance Committee Chairman Orrin Hatch (R-Utah) and Sen. Marco Rubio (R-Fla.). A companion bill (H.R. 35) was introduced in the House on Jan. 3 by Rep. Michael Burgess, M.D. (R-Texas), Chairman of the House Energy and Commerce Committee’s Subcommittee on Health. Also in February, Sens. Bill Cassidy, MD (R-LA) and Susan Collins (R-ME), joined by cosponsors Lindsey Graham (R-SC), Shelley Moore Capito (R-WV) and Johnny Isakson (R-GA), introduced the Patient Freedom Act (PFA) of 2017 that would, among other things, allow HSAs to pay for health insurance premiums, for family members to pool dollars to pay for increased expenses, and to allow insurance companies to offer HSA/HDHP policies that cover all inpatient services.
The bottom line? HSAs already have a lot going for them – and the future looks even brighter. Advisors who haven’t yet focused on this new growth area are well-advised to do so.
