Thirteen years into this HSA experiment, health savings accounts are still wildly misunderstood. Are they employer-sponsored health plans, spending accounts, checking accounts, savings accounts, investment accounts, or is it now most appropriate to refer to them as a retirement savings vehicle?
Here’s what HSAs are not: employer-sponsored health plans, despite the fact that many employers assist in establishing them for employees and contribute to the accounts. HSAs are best thought of as individually owned tax-exempt trust or custodial accounts available to individuals covered by what the IRS considers to be an HSA-eligible health plan. That’s pretty cut and dry, however it’s easy to see why there is still so much confusion. After all, an HSA shares many of the characteristics of the accounts listed above, and it’s up to the individual to decide how best to use the account.
Most consumers so far have yet to fully understand the opportunities and securities presented by an HSA — often misusing it as a checking account — but technology is helping to change that, engaging them on platforms that allow them to see the value of saving rather than spending. These emerging technologies also are helping employers and individuals pick and choose between the many HSA offerings.
Think of the HSA as having two components all under one tax-sheltered umbrella: A cash component for spend and an investment component for long term savings. If the cash component of an HSA is merely a spending account, what’s the benefit to having consumer engagement tools embedded into what otherwise looks like a checking account? The answer is it’s an opportunity to change behavior in how employees are using their HSA.
In an effort to demystify the HSA, let’s segment HSA owners into three buckets: The Spenders, The Savers and The In-Betweens. The Spenders are those HSA owners who use employee and employer contributions to pay for all qualified medical expenses as they roll in. The In-Betweens use employee and employer contributions to pay for some, but not all, medical expenses and are able to roll over a balance in the HSA from year to year. The Savers are a minority subset of the HSA market in that these folks are able to fully fund the HSA each year and pay for all qualified medical expenses through other means.
All three segments of HSA owners receive the triple tax advantage: Contributions to an HSA are not taxed, interest paid and earnings on investments are not taxed, and distributions for qualified medical expenses taken today — or at any point in the future — are not taxed. Since all three segments are afforded the same tax benefits, one of the most important things for employers and individuals to consider when evaluating an HSA offering are the consumer engagement tools and functionality embedded into the cash component of an HSA.
To select a holistic HSA offering that empowers consumers in this way, look for an HSA offering that has the ability to link healthcare claims and receipts to payment capabilities, as well as dashboards with interactive charts that help individuals better understand healthcare spending and savings trends. Access to these types of enhanced functionalities will be key to shifting consumers’ mindset on how to use their HSA, enabling them to make better decisions when managing their money in these accounts.
Better HSA cash management leads to more savings, and more savings leads to greater healthcare purchasing power, not only for today, but in retirement as well. It goes without saying that employees need more savings for retirement. According to Fidelity, a couple retiring in 2017 will need an estimated $275,000 to cover healthcare costs in retirement. Paying for those qualified medical expenses with HSA dollars, instead of from other retirement accounts, increases healthcare purchasing power because HSA distributions for qualified medical expenses today and in the future are not included as income and thus never taxed.
While it may be somewhat ignorant to assume all employees have the ability to save $275,000 in an HSA for retirement, it’s equally as ignorant to assume employees in only the highest tax brackets have the ability to save long term for future medical expenses. With that said, the vast majority of today’s HSA assets are held in cash and the majority of employees are considered Spenders or In-Betweens. The best way to change behaviors from a spending mentality to a saving mentality is by meeting employees where they are interacting in their HSA with easy-to-use and engaging technology. Employees that don’t have these added benefits will continue to use the HSA as a checking account and will spend down balances just as fast as contributions roll in.
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