Even as more companies offer health savings accounts and more people enroll in them, the investment savings component of the accounts remains small, representing 14% of the total $30 billion in HSA assets.
But asset managers, consultants and, of course, HSA administrators forecast greater growth in both HSAs and their savings opportunities. Their predictions are predicated on consumers and sponsors becoming more familiar with HSA rules and strategies, and on HSA providers and asset managers making adjustments to the 12-year-old industry.
“Big ships turn slowly,” said Marina Edwards, a Chicago-based senior consultant at Willis Towers Watson PLC, referencing the need for continuing comprehensive education to influence consumer behavior. “HSAs are a new module to work into the retirement education.”
Ms. Edwards is seeing greater interest among clients in offering HSAs. “They're beginning to educate employees as they have been doing with 401(k) plans,” she said. “They are becoming more savvy about the allocations of savings dollars to 401(k) plans and HSAs to maximize tax benefits.”
The federal law creating HSAs took effect in 2004, establishing tax-advantaged savings accounts linked to high-deductible health plans. In the face of rising health-care costs, the legislation was intended to encourage consumers to join high-deductible plans with lower premiums, improve greater consumer awareness of health-care costs and reduce overall health-care costs to employers.
Since the law's passage, another motivation for employers' offering high-deductible plans — and dropping other health-care plans — is the looming “Cadillac tax,” a 40% federal excise tax on costs over IRS thresholds for higher-cost health plans. This excise tax is part of the Affordable Care Act. Originally due to take effect in 2018, the tax's starting date has been pushed back to 2020.
The lure of HSAs is the triple tax advantage: contributions made to the HSA with pre-tax dollars; tax-free gains within the HSA; and tax-free withdrawals for qualified medical expenses. Individuals may contribute $3,350 this year; the maximum contribution for family coverage is $6,750. There's an extra $1,000 “catch-up” provision for people 55 and older, which applies to single and family coverage.
Despite the benefits, industry members and researchers agree there's a long way to go for greater HSA use because of many hurdles for participants as well as for sponsors. “HSAs are still pretty new, and most people view them as a health spending account,” said Eric Remjeske, president of Minneapolis-based Devenir Group LLC, an investment adviser and consultant in the HSA business. “They don't know when they will need the money for medical expenses, so they don't invest it in the health savings account. It takes awhile for people to learn how to use it.”
Total HSA assets reached $30.2 billion in 2015, about triple the amount in 2009, said the latest annual survey by Devenir Group. Investments accounted for $4.2 billion, or 14% of last year's total, according to the survey, which was based on responses from the 100 largest HSA administrators, most of which are banks.
The HSA investment amount was nearly triple that reported in 2009, and Devenir expects investments to take a larger piece of the HSA asset pie in the future — $9.7 billion, or 18% of total HSA assets by 2018.