Medical expenses, anticipated or otherwise, are a fact of life; it’s not about “if” but “when”, and as in all other things, it’s better to be prepared than to be caught off guard.
When people think about a health savings account it’s usually in relation to, well, healthcare. And while that’s natural given the nature of HSAs, it also means that their potential as an investment strategy is often overlooked by both plan sponsors and employees.
There’s a high barrier to entry in terms of education as well, because investing HSA dollars involves investment knowledge, an HSA and knowledge of HSA spending rules, and the fundamental knowledge that investing HSA contributions is even a possibility (something that, frankly speaking, is not an intuitive leap). In addition, given their pairing with high-deductible plans, most HSA educational efforts primarily focus on the more immediate benefits of health savings accounts like paying off day-to-day expenses like doctor’s visits, X-rays, physical therapy, medication, and other medical services that contribute to employees’ deductibles. That means that this blind spot is rarely being actively addressed; citing numbers from Alegeus, PlanSponsor reports that under 10% of those with an HSA invest their contributions.[1] Sponsors can help fill this educational gap by providing educational resources on this oft-forgotten strategy. Here are the top three questions employees have on HSA investment.
WHAT IS AN HSA, AND WHAT CAN I USE IT FOR?
A health savings account, or HSA, is a vested savings account where employees who opt for a high-deductible health plan can contribute money to be used toward qualifying medical, dental, and vison expenses. Both employees and their employers can contribute, and all employee contributions are tax-free up until the yearly contribution limit ($3,650 for individuals and $7,300 for families as of 2022). An important point for employees to understand is that money in an HSA must be used for medical expenses or be subject to steep fees: income tax on the withdrawn amount plus an additional 20% tax penalty. However, when spent properly, HSAs are a completely tax-free savings and investment strategy.
WHY SHOULD I USE IT, AND WHAT MAKES IT DIFFERENT THAN AN FSA?
Unlike their sister flexible spending accounts (or FSAs), which have a “use it or lose it” policy that means all money not spend by the end of the calendar year is lost, HSA balances roll over. This means that FSAs are designed for short-term spending while HSAs are designed for long-term savings; confusion on the details that make FSAs and HSAs distinct is one of the top reasons that the true long-term power of HSAs is overlooked. Additionally, the amount contributed to FSAs are determined at the beginning of the plan year and cannot be changed, whereas HSA investments can be variable, and HSAs are portable, meaning employees keep funds even if they change jobs. Because it’s portable, adaptable, and paired with lower-cost plans that have higher deductibles, HSAs can be helpful savings tools for lower-income employees who benefit from that flexibility. 2022
WHY SHOULD I INVEST IN MY HSA RATHER THAN MY RETIREMENT PLAN, PERSONAL INVESTMENTS, OR JUST SPENDING THAT MONEY?
This is the biggest most important question, and also the easiest to answer: “because frankly, you’re going to need it.” The statistics on healthcare spending are grim. 1 in 4 Americans declined to seek care for medical problems due to cost (according to the CDC this number narrows to 1 in 3 for adults ages 18-44), 48 million could not afford a prescription, and 45% are worried that a major medical event could bankrupt them.[2] [3] Additionally, a 2019 study by West Health and Gallup note that Americans borrowed $88 billion and took out $126 billion from their retirement and other long-terms savings accounts to pay for healthcare in the last year. And these numbers are pre-pandemic!
Emergencies by nature cannot necessarily be anticipated, and the numbers show medical care costs, especially emergencies, can be staggeringly high. Additionally, there’s the likelihood of developing a disability increases as one ages; the CDC reports that two in five (a staggering 40%!) of adults 65 and older have a disability. Medical expenses, anticipated or otherwise, are a fact of life; it’s not about “if” but “when”, and as in all other things, it’s better to be prepared than to be caught off guard. Due to the multifaceted financial advantages HSA investing offers as a tax-free investment strategy, those opting for high-deductible plans would most often benefit heavily from such options, perhaps even more than other investment strategies.
[1] https://www.plansponsor.com/plan-sponsors-mdust-bolster-hsa-education-boost-use
[2] https://s8637.pcdn.co/wp-content/uploads/2019/04/HCIDC_Presentation_2019.pdf
[3] https://www.cdc.gov/ncbddd/disabilityandhealth/infographic-disability-impacts-all.html
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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