Research | Published in March 2016

The Benefits of HSAs

Helping participants save for health care costs in retirement

By PLANSPONSOR staff | March 2016

2016 PLANSPONSOR HSA Buyer's Guide

Art by Marcos Chin
Health insurance plans have consistently, over the last two decades, topped the list of workers’ most precious employer-sponsored benefits. According to a recent report from the Employee Benefit Research Institute (EBRI), “Views on the Value of Voluntary Workplace Benefits: Findings from the 2015 Health and Voluntary Workplace Benefits Survey,” between 1999 and 2015, the percentage of workers ranking health insurance as the first or second most important benefit varied only slightly, between 74% and 82%. This while, from 2001 to 2015, the ranking of availability of retirement savings plans fell substantially.

This greater valuing of health insurance by employees, coupled with growing health care costs that continue to surpass the rate of inflation, has increased employers’ adoption of health savings accounts (HSAs) alongside consumer-directed high-deductible health care plans (HDHPs). In conjunction with this, the retirement industry is starting to include HSAs as part of a suite of retirement planning tools.

There is much justification for employees to switch to or value a health savings account (HSA) paired with a high-deductible health care plan (HDHP). They can grow HSA assets over their lifetime; the plan design will cost them less in premiums; and HSA savings can be used to pay for health care expenses after retirement, according to Justyn Harkin, a benefits communications specialist at Jellyvision, a provider of interactive software to help employees with benefits and financial decisions, in Chicago. Additionally, HSAs provide triple tax benefits, he says.

Indeed, contributions made to the accounts are tax-free; earnings on investments grow tax-free as long as they are used for medical expenses; and distributions to pay for medical expenses are tax-free. Further, HSAs are portable.

However, while these selling points may convince participants to sign on, once they do so, it is key that they receive ongoing support. Employers must ensure that those employees enrolled in an HDHP with an HSA continue to recognize the value of the benefit “because there are opportunities for profound disappointment” due to the change in how they will pay for health care, Harkin says.

“What happens when people are thrust into a consumerist position and not informed is they shut down and don’t get care. They may not go to the doctor until they feel they absolutely have to,” he says. “Employers want people to feel they are covered, so they can remain healthy and ready to work.”

Employers need to make sure their workers are educated about all the changes they will see and that they know how to maximize the HSA account and savings. According to Eric Roberts, a consultant at Nyhart Actuary & Employee Benefits in Indianapolis, because employees do not lose the unused money they put into HSAs each year, employers need to help them develop a new mindset. For instance, a participant may put more into the HSA annually than he will need, and the investment will grow as it does in his defined contribution (DC) retirement plan.

Of course, the key to growing HSA savings is to invest the money. Not all HSAs offer investments, and even those that do have been underutilized. However, market research from Devenir finds growth has taken place overall in HSA investments. The assets from these accounts reached an estimated $4.2 billion as of this past December, up 33% year over year, according to the company’s “2015 Year-End HSA Market Statistics and Trends” research report. The average investment accountholder has a $14,035 average total balance (deposit and investment account).

Former President of health savings account (HSA) Consulting Services LLC Todd Berkley cites research that found, after two years in the accounts, only 1.4% of employees are investing, but after five years, 5.6% are, and, by year eight, 10.5% are. Focused education will help, Berkley says, and some HSA trustees as well as financial advisers have begun to highlight this capability to employees.

“Investing HSA assets is no different from investing DC plan assets,” Roberts observes. “Employees just need to be made aware they can invest them.”

According to the Devenir report, the number of HSAs rose to 16.7 million, holding nearly $30.2 billion in assets, for the period of December 31, 2014, to December 31, 2015; this was a year-over-year increase of 25% for HSA assets and 22% for accounts. Health plans remain the largest driver of growth for HSAs, Devenir says. During 2015, for example, health plans accounted for 36% of new accounts. The firm projects that, by the end of 2018, the HSA market will likely exceed $50 billion in assets, covering almost 30 million accounts.

Based on the Devenir report data, the nine HSA providers that took the time to participate in the first PLANSPONSOR HSA Buyer’s Guide, which follows, represent about one-seventh of the market.