HSAs Can Serve as Investment Tool Beyond Current Healthcare Expenses
Time and experience are shifting how individuals look at health savings accounts (HSAs). Thinking beyond immediate health expenses, a greater number of consumers are looking at HSAs as vehicles for their future health care needs.
To no one’s surprise, HSAs continued to experience major growth throughout 2017. According to Devenir’s 2017 Year-End HSA Market Statistics & Trends, there were over 22 million HSAs at year-end 2017, which is an increase of 1.2 million from year-end 2016. HSAs also held roughly $45.2 billion in assets—an increase of 22 percent over year-end 2016.
Key Growth Factors
These numbers continue an upward trend that the market has seen for many years, but what are some of the transitional factors behind this sustained growth? When looking at last year’s strong asset growth, 2017 was affected by three key factors.
1. Invested Amounts – Credit needs to be given where it is due. At the end of 2016, the Dow Jones Industrial Average closed at 19,975 points. On December 31, 2017, that same index closed at 24,719. This 25 percent market gain accounts for only part of the growth as invested assets grew by 53 percent year-over-year. HSA owners who were already invested in the market realized strong growth based on the market’s success. They had already made the transition from spender, to saver, to investor, and reaped the benefits. The increased asset size also illustrates that a number of new HSA owners made the transition into long-term investing.
2. Carry-Forward Balances – Devenir’s research shows that for the fourth year in a row, contributions exceeded distributions by more than $5 billion. This continual carry-forward balance is a key driver in asset growth, but more importantly, it illustrates that a significant percentage of HSA owners are building HSA balances versus spending or at times, being forced to spend, their flexible savings account balances.
3. Payroll Deduction – According to Devenir, the percentage of employee contributions made through payroll deduction increased from 46 percent in 2016 to 63 percent in 2017. In addition, the average employee contribution increased from $1,786 to $1,921.
The last factor is helping to create a macro shift in long-term savings through the use of payroll deduction.
Planning for the Future
A greater number of consumers are looking at HSAs as vehicles for their future health care needs. According to a report released by ConnectYourCare, this trend increased from 40.5 percent in early 2017 to 44.9 percent in early 2018.
HSAs continue to evolve along the model of spender, to saver, to investor. But they are further evolving by looking at HSAs as a key supplement to future health care expenses in retirement. Remember, estimated health care spending during retirement ranges from $250,000 to $400,000 (depending on which article you read).
When saving for retirement, a historically accepted principle has been to contribute (or work up to contributing) the minimum amount necessary to obtain full employer matching dollars in a retirement plan. Hence, comes the phrase “it’s free money.” But as consumers begin incurring major health care expenses, they’ll start connecting the dots between these unexpected expenses and their overall retirement needs. They’ll quickly realize that their need for more substantial retirement savings is critical. They’ll also start thinking of where to place their payroll deferrals, which could create a possible competition between retirement plan deferrals and HSA deferrals. A question that more employees will be asking their employers and advisors is, “Where should I invest my money?”
A survey conducted by Alegeus outlined that what consumers believe and what they do can be vastly different when it comes to understanding how to cover expenses for current and future healthcare needs. According to Alegeus’ research, 51 percent of the respondents fear unexpected healthcare expenses near-term. In addition, 68 percent of those enrolled in healthcare benefit accounts believe themselves to be in the saver category (described earlier) where they focus on carrying forward HSA assets year after year. The reality is that only 23 percent of consumers save anything beyond the current year and more than 50 percent underfund their healthcare savings. What is perhaps the most disheartening from this Alegeus survey is that 70 percent of the participants could not pass a basic HSA knowledge test.
The New Challenge
Those of us who assist employers and their employees through retirement and health care planning are facing a new challenge. A recent article published by the Journal of Financial Planning states that most employees are better off deferring to their HSA first in order to cover the current year’s potential expenses. Employees should then begin deferring in their 401(k) plan and work toward maximizing the employer match. The study emphasizes that deferred dollars used for qualified medical expenses are tax-exempt and can provide an immediate benefit if needed. After the employer match is achieved, then employees should begin planning where the next dollars deferred are best served.
Whether you work in a bank or credit union serving local employers or employees, or you’re an advisor seeking to strengthen your role with an employer, it is critical to understand that the environment is requiring a stronger knowledge of your role in health care—both near and long term—when employees are seeking answers on where to place those precious deferral dollars. You and your teams will need to understand this new balance in order to remain competitive.