HSAs Shrouded in Misconceptions

As America’s health insurance industry struggles through a state of uncertainty and Americans face rising health care costs, employers are turning to various strategies to help employees cover medical expenses.

One increasingly popular option is the health savings account (HSA), available to employees with high deductible health plans (HDHP). These products help people save and invest for current and future medical expenses.

However, new research by Fidelity Investments suggests many Americans are unaware of the various benefits HSAs can offer. According to the firm’s study “Making the Most of Your HSA,” only three out of ten people surveyed are aware that HSAs are not governed by a “use it or lose it” policy, which applies to flexible spending accounts (FSA).

Eric Dowley, senior vice president, HSA Product Management, Fidelity Investments, tells PLANSPONSOR that several people the firm surveyed are hesitant to enroll in an HSA because they believe their money is limited as it in an FSA.

However, there are plenty of steps industry stakeholders can take to encourage HSA use.

“As an industry, we have an opportunity to give people a better understanding what HSAs are and how they work,” he says. 

The money in HSAs rolls over each year and any investments continue to grow even past retirement as there are no required distributions at any age. Moreover, they offer a triple-tax advantage: contributions are made pre-tax, the money grows tax free, and qualified withdrawals aren’t taxed.

NEXT: Investing HSAs

These advantages are part of the reason why HSAs are often promoted as retirement-conscious vehicles, but Dowley says several employees are unaware that money in these accounts can be invested.

“Fifty three percent of people weren’t really aware of how it would function as they think about retirement,” explains Dowley. “We try to help people with HSAs understand that they will have serious health expenses in retirement and that they do have a vehicle to plan for them now and save for them in a tax advantaged way.”

Employers can stand to gain from better communicating these benefits to employees while also helping them determine how much of their contributions they need to set as cash and how much of it they can invest, he says.

According to Fidelity’s report, the average balance of HSA holders who hold 100% of their contributions in cash is $2,500. The average balance for those who include other investments is $14,000.

But like choosing a health care plan, or deciding how to invest retirement savings, choosing investments and determining how much to contribute can be challenging. Fidelity suggests walking employees through the process in a few steps. The amount is ultimately determined by setting aside enough in cash to cover expected health expenses in a given year and investing the rest. This question can be answered by factoring in determined expenses, deductibles, and maximum out-of-pocket costs.  Plan sponsors and their providers can play key roles in helping employees better digest these often complex concepts.

“The more employers communicate this, the more willingness they have to talk to employees about what an HSA is in simple terms and how it can work for them, and the more demystification you can bring to the health care industry, the better,” says Dowley.

Continued guidance is also important.“Make sure that people have the confidence to set the right level of what they need in cash and what they need invested,” he says. “The last thing you want is to get someone to have exposure to the market when they need cash near term. Supporting that conversation and thinking is important,” says Dowley.

Today, plan sponsors have a variety of options to choose from when it comes to HSAs. Dowell recommends keeping a close eye on fee structures and business models. “Looking at what the underlining expenses of getting invested is important. That’s something that gets a lot of scrutiny in the 401(k) space, but I think it gets less visibility in the HSA space. As employers who are picking administrators or companies to help their people with HSAs, they need to understand what the underlining cost structure is of an investing account or the investments themselves.”

Fidelity Investment’s full report can be found at Fidelity.com.