HSAs see slow but healthy gains

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.

Total HSA assets and HSA investments are tiny compared to defined contribution and individual retirement account assets. At the end of 2015, the Investment Company Institute said DC plans held $6.7 trillion in assets and IRAs held an estimated $7.3 trillion.

Not only is relatively little money being invested in HSAs, but also very few participants are investing, according to the Employee Benefit Research Institute, Washington.

By the end of 2014, an EBRI report said, 6.4% of HSA account owners had used the investment option.

“This doesn't bode well if you are trying to use this for retirement,” said Paul Fronstin, director of EBRI's health research and education program, in an interview. EBRI's report, which was published in 2015, uses the organization's database of 2.9 million HSA accounts with $5 billion in total assets. EBRI's database covers 21% of HSA assets.

Total contributions to HSA accounts were higher for people who made investments vs. those who didn't invest, “suggesting that (these) account owners are using their HSA either as a retirement vehicle or a long-term savings strategy,” the EBRI report said.

Participants contributed an annual average of $2,636 when they had investments vs. $1,224 when they didn't have investments, the report said. Annual employer contributions also were higher for accounts with investments than those without investments — $586 vs. $519.

The EBRI report said HSA account owners with investments were older — an average age of 48.5 vs. 43 for those without investments. Younger HSA participants “are not seeing the long-term potential of the account,” the report said.

Year-end 2014 account balances averaged $10,621 among HSAs with investments vs. $1,293 for HSAs without investments, the EBRI report said.

Mr. Fronstin said he expects participants will increase their savings and investments, and “become more engaged as products become better and there is better communication.”

HSAs are influenced by many factors that have affected adoption by sponsors and use by participants — even though rates for both are growing.

HSAs are tied to high-deductible health plans — also known as consumer-directed health plans. There's no guarantee employers will add an HSA component to the plan, or that the HSA will contain a broad range of investment options, or that employers will contribute to the HSA accounts.

Internal management rules — such as requiring account minimums before a participant can invest in a mutual fund within the HSA — can depress usage rates. And because HSAs are individual accounts, there's a good chance the investment options will carry retail prices rather than institutional ones.

“In a perfect world, HSA investments would mirror the 401(k) investment with having institutional shares,” Ms. Edwards said. “But that's usually not the case. Typically, HSA investments are retail mutual funds. This is where the industry can improve.”

Still, there are signs of greater interest in and adoption of HSAs.

Recent research by Mercer LLC shows employers are more willing to link HSAs to their high-deductible plans. Among sponsors offering high-deductible plans last year, 50% made them eligible for HSAs compared with 14% in 2009, according to a survey based on a nationally representative sample of 1,520 employers with more than 500 employees.

Employers can take several steps to encourage HSA participation, including contributing to these accounts, said Jay Savan, an Atlanta-based partner at Mercer. “It helps prime the pump,” he said. “It shows a company commitment.”

The Mercer survey found that 37% of eligible employees enrolled in HSA-eligible high-deductible plans when an employer contributes $800 or more. When an employer contributed less than $500, the enrollment rate was 32%. When the employer didn't contribute, the enrollment rate was 22%.

Employer encouragement can take many forms such as providing seed money for new accounts, offering matching funds or making contributions based on employees' achieving certain wellness goals.

“We recommend that employers make the contributions,” said Todd Berkley, the Bloomington, Minn.-based senior vice president and managing director of BenefitWallet, a unit of Xerox Corp. that administers HSAs. “It offsets some of the impact of the high deductible. It sends a signal that we are in this together.”

BenefitWallet administers $2 billion in HSA assets.

Mr. Berkley said employer education is as important as employee education.

Several years ago, BenefitWallet conducted a survey of sponsors with HSAs, concluding that failing to provide “extensive educational support” and lacking targeted communications hurt participation rates. The firm encouraged sponsors to use face-to-face meetings, webinars and multiple media sources.

“You have to start education early,” Mr. Berkley said. “Catch them at open enrollment.”

Consumer education is a challenge because there is still confusion about HSA rules and practices. Mr. Berkley and other industry experts lament that many participants still mistakenly equate HSAs with flexible spending accounts.

In the latter, participants must spend their accounts in a plan year or lose the remainder. For HSAs, they can carry unused balances into the next year.

“We see a lot of people feel that they have to spend it during the year,” Mr. Berkley said. “A lot of people don't realize they could put more in. The most powerful feature of the HSA is the long-term savings impact.”

Over time, consultants and industry members say, participants who have become more knowledgeable about HSAs and comfortable with HSA investing have developed a strategy for their retirement savings plan. First, they contribute enough to their 401(k) plan to take advantage of the corporate match. Second, they make the maximum contribution to their HSA. Third, if they still have money to invest for retirement, the extra money goes into the 401(k) plan, too.

And some consumers might choose to put all or most of their HSA contributions into the savings component, preferring to pay immediate health-care costs out of pocket.

Consumers will be motivated to learn the saving and investing strategies for HSAs because more of them will have no choice as companies make high-deductible plans their only health-care plan.

Known in industry parlance as full-replacement plans, they represented 15% of health-care plans, according to an as yet unpublished survey by Aon Hewitt, Lincolnshire, Ill., covering 804 clients, most of which are corporations.

Another 43% of sponsors said they plan to offer full-replacement plans within three to five years, said the survey, which was conducted from December through February. Among the respondents, 53% had more than 5,000 employees.

Larger companies are the most receptive to the full-replacement plans, said Karen Frost, senior vice president for health strategy and solutions at Aon Hewitt. Some employers will make contributions to the HSAs linked to the high-deductible plans. “It helps mitigate the fear of the big deductible,” Ms. Frost said. “They want employees to try the new plans.”

Also, Aon Hewitt hasn't detected any decrease in retirement plan participation when a high-deductible/HSA health plan is introduced, said Kenje Mallot, financial solutions product manager at Aon Hewitt.

“HSAs are another vehicle for savings,” Ms. Mallot said. “As people become more comfortable and products become more mature, we can expect more savings in HSAs.”