State of the Industry
Tiptop Health Savings Accounts
How to utilize design, metrics and education to improve employee engagement in HSAs
Jeff Dorfman, principal of Qualified Plan Advisors in Houston, has been watching health savings accounts (HSAs) develop through the lens of the 401(k)’s development. “The similarities are interesting,” he says. Employers originally viewed a 401(k) plan as a satellite employee benefit, but, over time, they came to see it as central to retirement planning—and as that happened, they started paying much more attention to the vehicles. “HSAs have mirrored the same evolution,” Dorfman says. The accounts have yet to be considered a central benefit by most employers, he says, but he sees that coming. “One reason is that, from an employee perspective, an HSA is arguably the single most powerful wealth-creation tool that an employer can offer as a benefit. It has all of the savings benefits of a 401(k) but additional features that, in some ways, make it more powerful.” Unlike with a 401(k), HSA money may be withdrawn tax-free if it pays for qualified medical expenses. And, unlike health insurance or a 401(k), an HSA is both a benefit for employees’ near-term needs and their long-term needs, he says. “It’s the only employer benefit that is both a current benefit and a future benefit.”
Like with a 401(k) plan, the design of an HSA benefit plays an important role in employee engagement, especially if the employer makes a contribution. “Definitely, making an employer contribution is one of the best practices if you want to encourage uptake of HSAs and HSA-eligible health plans,” says Begonya Klumb, head of HSAs at Fidelity Investments in Boston. “Seventy-eight percent of our HSA clients offer some form of employer contribution, and the majority make a once-a-year contribution, which tends to be at the beginning of the year.” It typically comes in the form of a flat-dollar contribution, she says, and some employers vary the amount based on an employee’s income, with lower-income employees receiving a larger contribution.
It is not yet common for employers to do an HSA match, says Nate Black, vice president, consumer driven health at Voya Financial in Minneapolis. “The employer contribution today usually is not tied to employees having to contribute,” he says. “But we believe there are many learnings from the defined contribution [DC} world that can be applied to the HSA world, and one thing that really drives participation in 401(k) plans is an employer match. An employer match drives a very different set of incentives for employees, because then they’ve got some skin in the game. And we do think more employers will do an HSA match in the future.”
Some employers, having seen the power of automatic enrollment in their 401(k) plan, are auto-enrolling employees who choose a high-deductible health plan (HDHP)—a requirement to be eligible for an HSA—into one of the accounts. “These employers say to employees who go into a high-deductible plan, ‘Hey, we’re going to enroll you in an HSA, and here’s the value in that for you.’ Absolutely, we see many employers take that path,” Black says. But there is no default deferral, he notes. Previous Department of Labor (DOL) guidance has given the OK for HSA auto-enrollment. But it has also indicated that if an employer wants to keep its HSA benefit from crossing the line to becoming an Employee Retirement Income Security Act (ERISA) plan, an employee’s contributions must be directed by only that individual.
Qualified Plan Advisors has had many conversations with clients about auto-enrolling employees into HSAs, though most have yet to do it, Dorfman says. “But if you want to think about the reason to do it, you can look at the evolution of 401(k)s as a guide.” It took about 30 years for employers to move from widespread skepticism of auto-enrolling into a 401(k) plan to widespread acceptance of doing so as a best practice to help employees, he says. “I think employers will need to go through the same evolution of thought as they did with 401(k)s. The good news is that this road has been traveled before, and I don’t think it will take 30 years to get there with HSAs.”
Tracking Key Metrics
Employers that want to get serious about improving HSA engagement need to track key metrics closely. “The first step is to think about, what are the metrics to determine success?” Dorfman says. “Employers will need to ask themselves, ‘Is this predominantly a health benefit, or is it predominantly a retirement-savings benefit?’”
Often, because employers view HSAs as the former, they fail to focus on the right metrics, he continues. “For example, enrollment alone is not a very meaningful metric for an HSA, if it’s primarily a retirement-savings benefit. Participation in a 401(k) is just a small metric to measure success,” he says. “What really measures success is metrics such as average deferrals and investment diversification. If you look at an HSA through the lens of it being a wealth-building vehicle, those are the kinds of metrics you need to track.”
Black suggests three categories of metrics that plan sponsors should focus on tracking. “The first is how many people are participating in the HSA [program]. The second is contributions, looking at data such as average contributions and what share of income is being put into the HSAs,” he says. “The third is the share of employees who are investing their HSA money, which is really a metric for how many see their HSA as a long-term benefit.”
Employers should set goals for improving the key metrics, Black recommends. Voya works with its employer clients to set goals specific to each, based on factors such as employee demographics, how much the employer subsidizes employees’ high-deductible health plan costs, and how much the employer contributes to employees’ HSAs. “There are so many variables,” he says. “I don’t know if I’d say there’s a single rule of thumb on the goals for improvement you should set. But you should absolutely set specific goals.”
Not all employees who pick a high-deductible health plan will immediately decide to enroll in an HSA, says Scott Riordan, vice president of health and welfare services at Sentinel Benefits & Financial Group, in Wakefield, Massachusetts. “If an employer is introducing HSAs for the first time, 15% to 20% initial enrollment is what we see typically,” he says. “The more the employer is willing to ‘seed’ the HSAs with an employer contribution, the higher the uptake will be.” HSA participation typically grows gradually, over time, he says.
The average balance in a Fidelity HSA is currently $5,800, Klumb says. Seventeen percent of Fidelity HSA-holders have invested at least some of their assets—for a total of 42% of Fidelity HSA funds—and that is with an intensive communications and education campaign. “We have seen that number growing over the past five years significantly,” she says.
In Sentinel’s book of business, about one-third of total HSA contributions are invested, versus being held in cash, Riordan says. “I do think it has risen steadily: It was probably 25% a couple of years ago.” How high the percentage goes depends on average balances, plus the effort an employer makes to explain the concept. “Unless you educate employees, many people don’t even know it’s possible to start investing in their HSA,” he says. “A good rule of thumb [for them] is to at least have enough in cash to cover a year’s worth of the deductible, and then consider investing the balance.”
Riordan says it is important for employers to keep an eye on HSA utilization metrics; Sentinel regularly reports to its clients the aggregate data for the most significant ones, such as the average account balance and investment allocations. “Looking at the metrics helps to shape your understanding of how people use their HSA,” he says. “Is it being used as a transactional, dollar-in and dollar-out account? Or are employees accumulating savings in their account? By looking at the metrics, you’ll know if [the program is] headed in the right direction. You’ll know when employees start to think of their account more as a retirement-savings account than as a transactional account.”
It is also important for an employer to compare utilization of its HSA benefit with how the accounts are used at other employers, Klumb says. “Definitely, you want to use benchmarks, and look at those employers around you, to see how you’re doing,” she says. “We help an HSA client evaluate that information against the aggregate analytics for all of our HSA clients: We benchmark it against our book of business overall and that employer’s particular industry.”
3 HSA Education Fundamentals
Getting serious about HSA engagement also means getting intentional about communications and education. Start with these three fundamentals:
1. Make communication ongoing, not once a year.
Mention the HSAs more than just at open-enrollment time. “The best HSA education views the HSA as a lifelong benefit,” says Jeff Dorfman, of Qualified Plan Advisors. “Health-plan education is communicated every year. If you explain the HSA as simply a component of an employee’s annual medical open-enrollment choices, then you’re doing a disservice to employees, because they won’t think of it as a long-term benefit. That’s a perspective issue, and you need to shift your employees’ perspective.” Employers communicate about their 401(k) as a lifelong benefit, with education happening throughout the year, and the same should be true for HSAs, he says.
2. Offer decision-support tools.
“For a certain employee cohort, education alone is sufficient, and they can self-select the health-insurance option they think is best for them,” say Nate Black, of Voya Financial. “For another cohort of employees, education is helpful, but they really want guidance.” Many may feel hesitant about moving to a high-deductible health plan (HDHP) and HSA, and they want the input of a knowledgeable person or a tool that helps them determine whether these benefits will work for them, given their specific circumstances, he says. Employees often neglect to put time into their annual open-enrollment decisions, so it is important to make the process easy for them, says Begonya Klumb, of Fidelity Investments. “Decision-support tools can help employees calculate which one of the choices will lead to the lowest cost for them and their family,” she says. A good decision-support tool can estimate an employee’s out-of-pocket medical costs for the coming year with different health plans, indicate the employer’s contribution for the high-deductible plan and HSA benefit, and estimate the tax savings if the employee contributes to an HSA, she says.
3. Integrate HSAs into retirement education.
It is key to convey that an HSA is for retirement saving, not just to help with current medical expenses, says Scott Riordan, of Sentinel Benefits & Financial Group. “HSAs need to be more and more part of the conversation about saving for retirement,” he says. “For employers that aren’t looking at things in a silo, but at the overall financial wellness picture, it’s important that HSAs are part of that retirement conversation.” —Judy Ward
HSA Positioning by Employers