Experts say more education is needed before higher contribution limits will help
As Congress debates expanding allowable contributions to health savings accounts, research shows most participants don't make maximum contributions and many have little or no understanding of how HSAs work.
"Raising the limits isn't everything" for improving the use of HSAs, said Paul Fronstin, director of the health research and education program for the Employee Benefit Research Institute, Washington.
EBRI research, in fact, shows that familiarity breeds content, among workers who contribute to HSAs.
"The longer someone has had an HSA, the more likely they are to contribute the maximum," said an EBRI report issued July 30.
EBRI's database shows only 6% of HSA accounts that were opened in 2016 had the maximum contribution. The current limit is $3,450 for a single account holder and $6,900 for family coverage. Workers who are 55 and older and not enrolled in Medicare can contribute an extra $1,000.
However, when EBRI looked at HSA accounts that were opened in earlier years, it found a consistent pattern of more maximum contributions taking place in 2016 depending on how long someone used an HSA.
For accounts that opened in 2012, for example, EBRI data show 20% of participants made a maximum annual contribution in 2016. For accounts that opened in 2006, EBRI said, 30% of participants made the maximum annual contribution in 2016.
In aggregate, only 13% of HSA account owners contributed the maximum amount in 2016, the last year for which data are available. Mr. Fronstin said the low percentage is due primarily to most HSAs being new.
EBRI tracks 5.5 million health savings accounts with a total of $11.3 billion in assets as of year-end 2016. Its database covers 27% of HSAs and 31% of HSA assets. Seventy-seven percent of the database reflects HSAs that opened between 2013 and 2016.
A triple tax advantage
HSAs, created by a 2003 law, provide a triple-tax advantage only for workers who participate in high-deductible health plans. Contributions are made with pretax dollars; investment gains within HSAs are tax free; and withdrawals from HSAs are tax free for qualified medical expenses.
HSA assets continue to grow. For the year ended June 30, assets rose 20% to $51.4 billion vs. the previous year, according to a research report by Devenir Group LLC, Minneapolis, an HSA research and consulting firm. An estimated $9.8 billion, or 19%, represented investment assets.
Two bills approved in July by the House of Representatives have been promoted as ways to increase HSA participation and account balances. One bill raises an individual's HSA contribution to $6,550 and the contribution coverage for a family to $13,300. The other bill allows participants to use HSA accounts to cover some amounts for over-the-counter drugs and for physical fitness expenses.
The Senate hasn't acted on either bill.
Knowledge a barrier
HSA growth has been hampered in part by participants' lack of knowledge or minimal understanding, according to researchers. Twenty-three percent of employees told the Insured Retirement Institute and the LIMRA Secure Retirement Institute they lacked any knowledge about HSAs. Also, 26% said they were "not very knowledgeable" and another 36% said they were "somewhat knowledgeable." The consumer survey, published in March, was based on responses from a national sample of 2,141 people.
Among the "somewhat knowledgeable" group, 41% incorrectly said they must spend their HSA balance by year-end or forfeit, thus confusing HSAs with flexible spending accounts, the survey report said.
And among HSA participants who said they know they can roll over unused HSA money, 74% said they use their accounts primarily for paying current health-care expenses rather than saving for future expenses.
"Awareness has to increase," said Judy Zaiken, corporate vice president-strategic initiatives for the LIMRA Secure Retirement Institute, Windsor, Conn.
HSAs "require deferred gratification" by consumers, she said. "There is a great opportunity for the industry to educate consumers."
Participants' confusion is partly due to decades of education by plan sponsors about the use-it-or-lose-it rules governing flexible spending accounts, said Sara Taylor, health product strategy leader for Alight Solutions, Lincolnshire, Ill. "It takes a lot of work" to educate consumers about the difference between the two offerings, she said.
Ms. Taylor recommends to clients to start their HSA education campaign with a simple statement: "The money is yours. You don't lose it."
Explaining the tax benefits of HSAs is fine, but the straightforward message is better, she said. Communication campaigns must be targeted to specific demographic groups, she added.
Income, age are factors
A survey of Alight Solutions clients, published in late August, found that higher-income employees are more likely to contribute annually to HSAs — 46% of those earning less than $20,000 vs. 77% of those earning more than $250,000.
Age also plays a role in HSA contributions: 68% of workers 50 to 54 vs. 52% of those 26 to 29. Among the oldest group in the survey, ages 60 to 64, Alight said 57% contributed.
And even when employers use financial incentives to encourage greater HSA participation, Alight found that employees contributed less of their own money when employers provide some support. The average contribution was $2,690 when employers don't offer incentives vs. a range of $2,481 to $2,595 when employers provide some support.
"People have a target amount in mind for their HSAs," Ms. Taylor said. If an employer contributes, "they don't have an incentive to contribute more."
The survey report said 76% of HSA participants contributed some of their own money to their accounts this year vs. 71% last year.
The Alight survey covered 145 plans with 2.8 million participants.
A much larger survey by Willis Towers Watson PLC revealed more disturbing news, noting that 43% of employees enrolled in HSAs last year didn't contribute any of their own money to their accounts. The survey, published in December, covered 698 employers with 11.9 million workers. About 80% of the employers had 1,000 or more employees.
"We need more research on the barriers" to greater contributions, said Shane Bartling, senior director, retirement, at Willis Towers Watson, based in San Francisco. He suggested one reason for no, or low, contributions was participants' having to keep track of HSAs, FSAs and defined contribution plans. "It adds to the complexity of yet another financial account," he said.