Participants invest more HSA assets, but issues remain

As an investment vehicle, health savings accounts are in a "yes ... but" stage.

Yes, the aggregate assets of investments within HSAs have grown over time. But relatively few people use their HSA dollars for investments, preferring to retain the money in cash for spending on medical matters.

Yes, investments are taking an increasing percentage of overall HSA assets. But investment guidelines among HSA providers vary extensively and sponsors take different approaches to encouraging investments. Meanwhile, industry members and researchers say more education is necessary to make sure participants understand HSA tax benefits and investment opportunities.

"People are still trying to figure out how HSAs fit into their retirement savings," said Jake Spiegel, research associate at the Employee Benefit Research Institute, Washington.

EBRI's database showed 9% of HSA accounts had investments other than cash last year, a slow, almost steady, rise from 2% in 2011. The database contains 11.4 million accounts with assets of $32.9 billion as of Dec. 31, 2020.

The database covers HSA participants in retirement plans as well as individual participants with HSA accounts for which investments are allowed. About three-fourths of the accounts were opened since 2015.

"The transition in positioning of HSAs as a health benefit to a retirement consideration is still a work in progress," said an Aug. 10 report by the Plan Sponsor Council of America, referencing the latest annual survey of 191 employers with HSA-qualified health plans.

Total assets of health savings accounts reached $92.9 billion by June 30, with investments representing an estimated $30.4 billion, said a recent report by Devenir Group LLC, Minneapolis, an HSA researcher and investment consultant.

Total HSA assets rose 26% for the 12 months ended June 30. Investment assets climbed 73% during the same period.

Both Devenir and EBRI found that investments have a strong influence on the size and composition of HSA accounts.

Devenir reported that the average HSA balance as of June 30 was $17,954 for accounts with both cash deposits and investments, or 6.6 times the average balance for accounts without investments.

EBRI reported that when HSA participants include investments in their accounts, these assets represent 74% of their HSA balances.

"That subset of the population is clearly using HSAs as a long-term savings goal," Mr. Spiegel said. EBRI's database shows that the longer an account has been open, the larger the percentage of the balance is invested assets.

The growth of investments within HSAs and in overall HSA accounts has important implications for retirement savings.

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.

The IRS has raised contribution limits to health savings accounts for 2022. An individual employee may contribute $3,650, up $50 from this year. An employee with a family may contribute $7,300 for 2022 vs. $7,200 this year. An employee age 55 or older may make an extra $1,000 "catch-up" contribution in 2022, the same as this year.

Despite being available since 2003, HSAs still provoke uncertainty among participants.

"Some people may not want to invest or they put a minimum amount into their accounts," Mr. Spiegel said. Any time something new is offered in the benefits marketplace, "there's behavioral friction."

More education is needed but more financial support could help, too, he added. For example, EBRI found that accounts in which employers made contributions to HSAs had higher balances.

The average balance for an account with an employer contribution was $4,095, and the average balance for an account without an employer contribution was $3,583, according to the EBRI database. "We also find that total contributions are higher when an account holder has the benefit of an employer contribution — $2,834 for those with an employer contribution vs. $2,320 for those without," Mr. Spiegel said.

These findings suggest that "employers can play a crucial role in fostering employee engagement with their HSAs," an Oct. 14 EBRI report concluded. "One clear avenue is for employers to contribute to an employee's HSA on their behalf."

When asked about their concerns for HSAs, 79% of the PSCA respondents mentioned employee education as the top concern out of eight possible choices. Within the employee education category, 78.2% cited understanding the HSA tax benefits as a primary or secondary concern. The next biggest issue, at 33,1%, was contribution limits. (Multiple answers were allowed.)

To HSA executive Kevin Robertson, employees need greater familiarity with the HSA process and benefits. "Familiarity is a step beyond awareness," said Mr. Robertson, the Milwaukee-based senior vice president and chief revenue officer of HSA Bank, a provider of HSAs and other health benefits. "It's thinking for the long term."

Participants must become more comfortable with HSAs, he said. They start with HSAs as a spending vehicle for making health-care payments, but they need a better understanding about HSAs' investing opportunities, said Mr. Robertson, whose firm has about 3 million account holders and $10.7 billion in assets under administration. "There is a lack of economic encouragement by employers," he said.

He suggested that employers should consider making matches to HSA accounts, adding "there is a lack of familiarity by employers" for developing an HSA matching program,

"Any use of matching contributions by employers would help encourage employee contribution participation, just as it does in 401(k) plans," Mr. Roberston said. "We believe that the ideal scenario is to either mirror the same match rate as the 401(k) — so as to not cause preference of one vs. the other — and also consider a small seed contribution to start."

Among employers that contributed to HSAs, the PSCA report said 5.1% used a match. The most common employer support was a set dollar amount depending on an account's coverage level (73.2%) or a set dollar amount per employee (26.8%). Multiple responses were allowed.

One debate within the HSA industry is whether plan design affects investing.

For example, EBRI suggests that imposing minimum balances before investing is allowed could play a role in the low investing percentage in its database. However, Mr. Spiegel said the data analysis doesn't correlate these minimum balance requirements with investing behavior. The EBRI report said most HSA investors begin investing within three years of creating their accounts.

The PSCA report said 13.1% of respondents didn't require a minimum balance for participants to begin investing while 8.5% required minimum balances of less than $1,000. Thirty-four percent placed a $1,000 minimum balance on investing and 44.4% imposed a minimum balance of more than $1,000.

When given an investing option, an average 19.3% of participants made investments, which represented 28.7% of total HSA assets, the report said.

HSA providers that require a minimum balance say this is necessary to cover unanticipated medical expenses. "It's a safety net for the employee," Mr. Robertson said.

If employees have too much of their HSA account money in investments, they would have to liquidate some investments to help pay for the medical expenses, he said.

At one point, HSA Bank didn't require a minimum. "We introduced the minimum threshold to invest almost two years ago," Mr. Robertson said. "At the same time we removed all access fees to investments. Since then we have seen about a 20% increase in the percentage of investors in our HSA client base. This rate of increase in investing is higher than the previous trend rate." The minimum for an individual HSA account is $1,000. The minimum for employer-sponsored plans varies.

Among his firm's clients, "investor account holders keep an amount of cash in their base account that is more than twice that of the average cash balance of a non-investor," Mr. Robertson said. "This characteristic has been extremely stable since HSAs have been in existence, and hold true regardless of balance and demographics." When Morningstar Inc. looked at 11 of the largest retail HSA providers in its most recent annual survey, it found that four providers required no minimum balance, one had a $500 minimum, five had a $1,000 minimum and one had a $2,000 minimum. Morningstar only tracks the retail HSAs — not employer-sponsored HSAs.

Acknowledging some industry members advocate the financial-cushion concept, Morningstar considers a zero minimum balance as a best practice. "HSA investors are better off selecting providers with a low or no investment threshold," the report said.

"We think those individuals can make that decision on their own" about how much, and when, to invest, said Megan Pacholok, Chicago-based principal author of Morningstar's Oct. 7 report on its annual HSA survey and analyst for multiasset and alternative strategies.

Participants investing more HSA assets, but hurdles remain

Making investments within HSAs is growing, but researchers and advocates say providers and sponsors must do more to accelerate the pace.