20 Years After the HSA’s Debut, Don’t Let More Missed Opportunities Escape

This year marks the 20th anniversary of the Health Savings Account (HSA), without question America’s most valuable, tax-preferred employee benefit.

Not only does an HSA feature a tax deduction right out of the starting gate, it also boasts tax exclusions both on the amount of income earned in the account and distributions used for qualified health expenses – an extraordinary triple tax benefit. No other savings vehicle comes close to what the HSA can do in terms of leveraging the power of tax-favored benefits.

But there is even more value to ponder that is hidden beneath the surface. A handy sports analogy helps explain why. In baseball, there is no greater asset than a “Five Tool” utility player who can perform at a superior level at multiple positions in the field and at the plate. That description is akin to a human Swiss Army Knife. In employee benefits, the “Five Tool” utility player clearly is an HSA. It is aptly named, generating superior outcomes that fund needs across five different categories:

  1. Current medical, dental, vision, hearing, and long-term care (LTC) out-of-pocket expenses, as well as COBRA coverage and LTC premiums
  2. Future out-of-pocket medical expenses during retirement
  3. Medicare Part B and D and Medicare Advantage premiums, including Income Related Monthly Adjustment Amounts (IRMAA), during retirement
  4. Future retirement income, with HSA assets withdrawn after age 65 avoiding penalty taxes and qualifying for better tax preferences than those afforded to 401(k) contributions, and
  5. Legacy income without required minimum distribution or forfeitures for a surviving spouse or non-spouse dependent designated beneficiary who can continue to receive tax-preferred HSA benefits, while other beneficiaries will ultimately receive any residual assets as a taxable payout.

To coin another baseball term, that is the equivalent of a grand slam homerun – with one extra run batted in, no less. The HSA has given working Americans something to cheer about for the past two decades. It is a winning formula for attracting, motivating and retaining top talent.

But in drilling down into data involving the HSA, which was included in the Medicare Modernization Act of 2003, the significance of several missed opportunities becomes apparent. Look no further than the following five trends:

  • While we’ve seen dramatic growth in the number of HSA accounts and assets, they represent a small percentage of U.S. employers and workers. Only 53% of employers offer health coverage, according to a 2023 Kaiser survey, and of those that do, just 24% offer HSA-capable coverage. For all you actuaries out there, .53 * .24 = .13, which means 13% of all firms with employees captured in the Kaiser survey offered an HSA-capable coverage option.
  • What’s even worse is that most employers offer HSA-capable coverage as one of multiple health choices. And, unsurprisingly, where workers have a choice, most do not select the HSA-capable coverage option.
  • HSA contributions have remained stagnant, with a mere half of eligibles seeding their HSA, which is unchanged since 2017. Average annual individual contributions actually declined to $1,880 in 2021.
  • A similar argument can be made about HSA account growth. There were 36 million HSAs by the middle of last year, a year-over-year increase of just 6%.
  • A troubling lack of diversified investing. As many as 88% of accounts remained in capital preservation (money market) funds in 2021.

It’s worth noting that Congress was so concerned about HSA tax preferences that it scaled back the initial proposal so the 10-year budget impact (2004 to 2013) was estimated to be $6 billion. However, the actual “tax expenditure” for 2013 alone exceeded $2 billion. And, the projected “tax expenditures” for the 10-year budget period 2023 to 2032 for HSAs/MSAs is estimated at more than $178 billion!

BUT, if you are like most plan sponsors that offer health coverage to your employees, neither you nor your workers have received even ONE CENT of the HSA’s tax breaks over the past 20 years. To borrow from yet another baseball term: you’ve struck out!

Looking toward the next 20 years of HSAs and beyond, the possibilities are limitless as long as more opportunities are not squandered. Today, early adopters of HSA-capable health plans have significant account balances – including a handful that exceed $200,000. Assuming no change in statutes or regulations, by 2030 we will have our first household with HSA accounts totaling over $1 million!

While there is no use in fretting about what might have been, these mistakes should not be compounded. Investigate how HSA-capable coverage could offer superior value to your organization and workers before any more missed opportunities add up.

Value of a Medical Billing Partnership

To support annual enrollment and help manage plan design and administration, plan sponsors are benefiting from partnerships that provide them with insights through data-driven solutions. Real-time price information of the true cost of health care services enables sponsors and members to make the most advantageous cost-benefit decisions regarding enrollment options.

As your partner, aequum can help lower costs, achieve savings, enhance member experience and maximize your plan’s success in 2023/24 and beyond. Please contact us if you have any questions or need support.