The availability of health savings accounts (HSAs) to help fund health care expenses in retirement has long been a selling point for the vehicle, and of interest to advisors — and recent data suggests that those investment dollars are beginning to add up.
According to a report by the nonpartisan Employee Benefit Research Institute (EBRI), approximately 6% of HSAs in its database of some 2.9 million accounts had an associated investment account. Thirty-seven percent of HSAs with investment assets ended 2014 with a balance of $10,000 or more, whereas only 4% of HSAs without investment assets had such a balance.
Among HSAs with investment assets, accounts opened in 2014 ended the year with an average balance of $6,544, whereas those opened in 2005 had an average balance of $19,269 at that point. HSAs with either individual or employer contributions accounted for 70% of all accounts and 86% of the assets in 2014. Four percent of these accounts ended the year with a zero balance.
Triple ‘Play’
HSAs provide their account owners a triple tax advantage: contributions to an HSA reduce taxable income, earnings on the assets in the HSA build up tax free, and distributions from the HSA for qualified expenses are not subject to taxation. Because of this triple tax preference, some individuals might find using an HSA as a savings vehicle for health care expenses in retirement more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan. And HSAs often have an investment account option that allows account owners to invest in not just a money market account, but in mutual funds and other investment vehicles much like they would in a 401(k) plan. The EBRI report notes that it has been estimated that about 3% of HSA owners currently invest, and that HSA investments are likely to increase from an estimated $3 billion in 2015 to $40 billion in 2020.
Enrollment in HSA-eligible health plans is estimated to be about 17 million policyholders and their dependents, and it has also been estimated that there are 13.8 million accounts holding $24.2 billion in assets as of Dec. 31, 2014. Almost four in five HSAs have been opened since the beginning of 2011.
Contribution, Distribution Trends
On a yearly average, individuals in the EBRI HSA database who made contributions deposited $2,096 to their accounts. HSAs receiving employer contributions received $1,021 a year on average. Four-fifths of HSAs with a contribution also had a distribution for a health care claim during 2014. Among HSAs with claims, the average amount distributed for health care claims was $1,951.
The average HSA balance at the end of 2014 was $1,933, up from $1,408 at the beginning of the year. Average account balances increased with the age of the owner of the account. Account balances averaged $655 for owners under age 25 and $5,016 for owners ages 65 and older.
Not surprisingly, distributions for health care claims increased with age, with the exception of those ages 65 and older. Average annual distributions were $636 for account owners under age 25; $2,373 for account owners ages 55–64; and $2,124 for account owners ages 65 and older. Average annual distributions were higher for accounts that were older. However, the likelihood of taking a distribution for health care claims was higher among accounts opened more recently.
EBRI maintains a wealth of data collected from various health savings account (HSA) providers. The EBRI HSA Database contains 2.9 million accounts with total assets of $5 billion as of Dec. 31, 2014.
