HSAs' non-cash investments still low but rising slowing – EBRI

Investments other than cash in health savings accounts remains low even though the percentage of such investments has been rising slowly in recent years, according to a recent research report by the Employee Benefit Research Institute.

Non-cash investments reached 12% of account balances in 2021 — the latest data available — up from 9% in 2020, said the report describing EBRI's HSA database, which tracks 13.1 million accounts with total assets of $39.5 billion as of Dec. 31, 2021. This investment percentage has inched up steadily from 4% in both 2015 and 2016.

The increase in the investment percentage "is encouraging but a bit disappointing," said Jake Spiegel, EBRI's research associate in health and wealth. "Not everyone has the cash flow to invest."

Mr. Spiegel said the coronavirus pandemic likely played a role in suppressing HSA participants' investing as well as employers' contributions to HSAs."There was a lot of belt-tightening, especially since 2020" when the pandemic erupted, he said.

Although individual contributions to HSAs have been essentially flat since 2017, hovering around 50% of HSA accounts, employer contributions dropped to 42% in 2021 from 51% in 2017.

The EBRI research report, published Feb. 23, suggested the low investment rates might be due to in part to requirements by HSA providers that individual account balances hold a minimum amount — for example, $1,000 to $1,500 — before participants can make investments. "It may take more than one year for the average participant to reach that threshold," the report said.

Mr. Spiegel noted that previous EBRI research showed that if participants want to invest their HSA dollars most usually do so within three years of opening their accounts.

The EBRI report also said participants' familiarity with HSAs — those holding accounts for longer periods — leads to a greater likelihood of participants using HSA dollars for investments. "The longer someone has owned their HSA, the larger the balance tends to be, the higher the contributions tend to be, and the more likely they are to invest their HSA in assets other than cash," the report said.

HSAs are available to — and provide a triple-tax advantage for — participants in high-deductible health plans offered by employers. Contributions are made with pretax dollars, investment gains within HSAs are tax free and withdrawals from HSAs are tax free for qualified medical expenses. The money can be carried over year to year.

For 2023, the Internal Revenue Service defines a high-deductible health plan as one with an annual deductible that is not less than $1,500 for individual coverage or $3,000 for family coverage. The IRS also says annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) for a high-deductible health plan cannot exceed $7,500 for single coverage or $15,000 for family coverage.

In 2023, the annual contribution limit to an HSA is $3,850 for an individual and $7,750 for a family, according to the IRS.