Morningstar Magazine - October/November 2017 - 18

Dispatches

HSA Participants
Need Advice
And policymakers need
to better understand
the market.

POLICY

Jake Spiegel

Health Savings Accounts, or HSAs, are a relatively
new type of account. The U.S. Congress
created them in 2003, but it wasn't until 2010 that
more than 10% of the working population
had access to them, according to research from
the Kaiser Family Foundation. As a result,
according to HSA consultancy Devenir, assets
deposited in HSAs were only $37 billion at the end
of 2016, an amount that pales in comparison
to more-established tax-advantaged accounts,
such as the $5 trillion deposited in 401(k)s and $8.1
trillion in IRAs.
Additionally, few workers use their HSAs as
investments, leaving their HSA assets in checking
accounts instead. That's a problem because
for workers who have sufficient savings and can
pay for their health expenses with their
HSAs or other savings, investing extra assets can
be a powerful way to prepare for health expenses
in retirement. We see widespread confusion
due to a lack of guidance on how to best use HSAs.
Further, many who want to invest find
that their HSA fund lineups leave something
to be desired.

800 employers, Aon, a benefits consultancy, found
that 64% offered an HDHP as an insurance
option, with an additional 22% indicating they
were evaluating offering an HDHP in the
next three to five years. Another 15% offered an
HDHP as their only health insurance plan.
Devenir similarly sees growth in the market and
estimates total assets deposited in HSA accounts
will rise to $53.2 billion at the end of 2018.

Recent legislative efforts will nudge even
more workers into high-deductible health plans
with HSAs. Both recent healthcare bills in
the U.S. House of Representatives and Senate
dramatically raised contribution limits on
HSAs to as much as $13,600 for a worker using
a family plan. Although the healthcare bills failed
to pass, there is a strong push to expand
HSAs that could also be part of a tax reform effort.
Secure Retirement
HSAs are a powerful tool that can enable accountholders to achieve a more secure retirement.
They compare favorably to other tax-advantaged
accounts in that they offer a triple tax advantage, as shown in the exhibit below. Contributions
are on a pretax basis, investment returns grow
tax-free, and withdrawals are tax-free for qualified
medical expenditures.

Perhaps the best way to use an HSA, from
a wealth-maximization perspective, is to pay for
medical expenses incurred out of pocket and
invest HSA funds, allowing them to grow tax-free
over the course of a career. Of course, this
is only true for workers who can pay for their
out-of-pocket expenses with existing HSA balances
and other savings.

Those lucky enough to be able to apply
such a strategy can invest their HSAs for inevitable
retirement medical expenses, including Medicare
premiums. Fidelity estimated that a 65-yearold couple retiring today can expect to pay about
$260,000 in healthcare costs in retirement,
and even more if they wish to insure against
long-term-care costs. Also, HSA accountholders
can essentially reimburse themselves for
past expenses. For example, if a patient pays out
of pocket for an emergency room visit from
savings other than her HSA investment account,
she can withdraw that money 30 years later, after
the principal has had ample time to compound.
If accountholders find themselves in a position
in which they have more money in their HSA than
they can expect to spend on healthcare costs,
HSA funds may be withdrawn for any purpose after
age 65 and will be taxed at the accountholder's
marginal rate, much like an IRA. HSAs can
also benefit seniors already in retirement, as they
can be used to pay for Medicare part B, C,
and D premiums.
But Few Take Full Advantage

Despite the triple tax advantage and benefits
for retirees, few workers know how to maximize
the benefits of these accounts. In research
I conducted several years ago, I found that of the
HSA accountholders eligible to invest their
funds, only 5% actually did so. Other recent studies
have similarly concluded that few HSA accountholders invest their assets.
Why? One reason could be that no one is giving
advice to those workers who stand to be
benefit the most from investing in HSAs. Employers

Triple Tax Benefit HSAs have more advantages than other tax-savings vehicles.

HSAs Poised to Continue to Grow

Today, about 30% of workers have access to
HSAs, and the accounts are well positioned to
continue to grow. To have access to an HSA, a
worker must be enrolled in a high-deductible
health plan, or HDHP. Employers like these plans
because they cost less to offer to their employees
than traditional plans. In a survey of more than

Morningstar October/November 2017

Feature

Pretax contributions
No tax on investment returns
No tax at withdrawal
*Some 529s have pretax benefits on state or local taxes.
Source: Morningstar.

Traditional 401(k)

Roth 401(k)

529*

HSA

Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017