Health savings accounts touted as ideal vehicle for future medical care
The popularity of health savings accounts may be on the verge of surging higher as more companies encourage employees to use the accounts not only as piggy banks for immediate health expenses but also as long-term investments to be tapped only in retirement.
If the trend accelerates, so too will the growth of HSAs, industry observers say.
Engineering-consulting company Foth & Van Dyke LLC, a strong proponent of the saving benefits of HSAs, three years ago launched an education effort to encourage employees to use the accounts as long-term investment vehicles. "We wanted to make sure employees know they can use their HSA for medical expenses but if they don't need to use all of it, they can put it into a fund where it can earn more," said Nicole Gear, vice president of organizational development at Foth in Green Bay, Wis.
Roughly 85% of the company's workforce is enrolled in the company's high-deductible health plan and almost all of those in the plan have opened an HSA. About one-third of the HSA balances are held in investment accounts rather than deposit accounts, a metric that Ms. Gear said she "feels pretty good about" given that only 19% of the assets in HSA accounts nationwide today are invested, according to Devenir, an HSA research and investment services provider.
Solving two problems
HSAs are fast becoming the remedy for two problems weighing heavily on companies across the country: the need to both curb employer health-care costs and prepare workers for retirement. Many companies, such as Foth, are becoming "HSA shops" because they provide high-deductible health plans — the only type that allows HSAs — as their sole health-care plan.
While employers concede that workers are responsible for higher deductibles, they point to the benefits of high-deductible plans, including much lower insurance premiums and the tax-advantaged HSAs that come with them. Indeed, many say, the HSA is akin to a medical 401(k) on steroids.
Employers tout the triple-tax advantage of HSAs as superior to that of 401(k)s. In addition to HSA contributions being pretax, any investment gains and withdrawals for qualifying medical expenses are tax free. To make HSAs even sweeter, many employers contribute to the accounts, with some throwing in half of the deductible amount attached to the high-deductible health plan.
As a result, assets in HSAs nationwide have been rising steadily, jumping to $53.8 billion in 2018 from $19.3 billion in 2013, according to Devenir. Assets in HSA investment accounts have posted similar robust growth, hitting $10.2 billion last year, up from $2.3 billion in 2013.
In keeping with the upward trend, average balances in HSA investment accounts have climbed. At the end of 2018, the average investor had $10,948 invested, a figure that employers would like to see increase.
Mortgage Guaranty Insurance Corp., a publicly traded mortgage insurance company, switched to Fidelity Investments as its HSA provider in 2017 because it made HSA investing easier, said Brenda Grabowski, total rewards manager in MGIC's human resources department in Milwaukee. Employees now have access to a wide selection of target-date funds and mutual funds as well as a brokerage option with more than 2,000 stocks. More importantly, she said, employees can now more easily think of their HSA as a long-term retirement savings account, much like their 401(k).
"When you go to (the website to) see your 401(k) account, you also see your HSA and a rolled-up sum total, which reinforces both of these as retirement accounts," Ms. Grabowski said.
Communicating the benefits
Employers readily admit that changing the way workers think about and use their HSAs isn't easy. It's a challenge to get people to understand that they can pay for today's health expenses with money other than what's in their HSA "so that they can let the HSA grow," said Kelli Send, the Brookfield, Wis.-based leader of the employee education and advisory services division at consultant Francis Investment Counsel LLC. "It is a brand new horizon for these people because they never thought of it that way," she said.
Ms. Send has seen a strong uptick in the number of plan sponsors looking for assistance in choosing HSA providers for their workforces. Not all HSA providers offer investment accounts, which for many employers is a deal breaker, according to Ms. Send. Employers prefer providers that offer a mutual fund platform, she said.
"Why would you want to limit your employee choices on an HSA provider to just those offering money market funds?" Ms. Send asked.
Ms. Send said employers want to make sure the fund selection offered by HSA providers is adequate, even though they are under no fiduciary obligation.
Plan sponsors that offer an HSA need to know that they shouldn't just pick the local bank they happen to do business with, she said. "Even though it's not a fiduciary act to do right by their participants, it is our view that they do a search process just like they would an RFP for a 401(k) provider."
While sponsors are not responsible for HSA fund selection and monitoring as they are with their 401(k)s, that might change in time as HSAs become more popular, Ms. Send said.
Fees, too, are not generally monitored in HSAs. Because the balances in them are relatively small, HSA fees are higher than 401(k) fees, industry observers said. "Since an HSA is not an ERISA account, there is maybe a little less scrutiny over the fees than what you might see in a 401(k)," said Rob Austin, the Charlotte, N.C.-based head of research at Alight Solutions.
Plan sponsors brushed off criticism that high-deductible plans force employees to shoulder a greater health-care burden due to the higher deductibles they must meet before their insurance kicks in. Many argued that the lower premiums coupled with HSA employer contributions make high-deductible health plans the more cost-effective choice for many employees, especially after factoring in the tax advantages of an HSA.
"I do think you need to look at it as a total picture," Mr. Austin said, adding that plan sponsors are "forthright in sharing modeling tools."
Others argued that high-deductible plans make employees savvier consumers of health-care services, thus reducing their own personal health-care costs.
"Under a more traditional health plan, a lot of times the health plan participants don't have any sense for what things cost," Foth's Ms. Gear said, explaining that they might not request generics or shop around for better pricing.
"They are absolutely asking better questions and shopping for health care in the same way you might shop for other high-cost items," she said.