Health Savings Account Industry Set to Evolve in Coming Years
September 16, 2020 — Boston
A proliferation of financial wellness programs and increased involvement of retirement providers will contribute to renewed emphasis on healthcare planning
While contributions to health savings accounts (HSAs), along with total balances, are still negligible compared with 401(k) plans or individual retirement accounts (IRAs), the industry is expected to evolve during the next several years in response to trends emphasizing holistic planning and financial wellness, according to the latest Cerulli Edge—U.S. Retirement Edition.
HSAs have been available to members of high-deductible health plans (HDHPs) for more than 15 years, but despite their established presence, Cerulli suggests that HSAs remain underutilized—and less widely understood—in comparison with qualified retirement plans. Cerulli’s most recent 401(k) participant survey reveals that HSAs are not top-of-mind for many participants—when asked how they would allocate an additional $1,000, respondents rank HSAs last out of about a dozen options.
Health savings accounts offer various benefits. They are the most flexible, tax-favored vehicle through which to plan for medical expenses, yet, employees rarely use HSAs to their full advantage. “Retirement advisors and financial planners generally acknowledge the triple tax-advantaged nature of these accounts, making them an attractive vehicle for long-term savings, but many investors are in the dark,” according to Anastasia Krymkowski, associate director at Cerulli. Given that a medical emergency or costly procedure is likely to happen eventually, investors should plan ahead and cover these expenses with tax-advantaged dollars whenever possible. “After contributing enough in the 401(k) to earn the full employer match, a participant’s ‘next dollar’ is likely best directed to an HSA, if available,” says Krymkowski.
While a slight majority of participants with investable assets exceeding $2 million treat their HSA as a retirement savings vehicle, only one-third of respondents with $500,000 to $2 million (i.e., solidly “mass affluent”) do the same. Cerulli suggests that more participants in this demographic could benefit from conversations about taking a long-term view of health savings. Employers and financial services providers should discuss HSAs in the context of emergency savings and retirement planning, not just healthcare elections during annual enrollment. “The most effective campaigns will adapt to meet plan members at each stage of the process—whether recognizing the value of an HSA and opening an account, funding to meet the deductible, accumulating assets, or investing for the long term,” says Krymkowski.
Employers’ focus on financial wellness and the increased involvement of retirement providers (recordkeepers, advisors, consultants, etc.) is growing awareness of these benefits and framing HSAs in a longer-term, more holistic context. In fact, more than 40% of defined contribution plan recordkeepers participated in the HSA market as of 2019, up from 21% just two years prior, and Cerulli believes this trend of increased HSA involvement will continue. “Going forward, the industry will likely feature more nuanced and targeted communications, a streamlined user experience, expanded use of investments, and a prominent role for retirement providers to provide intensive education on the topic of HSAs,” concludes Krymkowski.