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Most Employees Not Maximizing HSA Potential

A jar of money with the word health on it.

​Health savings accounts (HSAs) are touted by industry insiders as a smart savings vehicle due to their triple tax advantage: Contributions are made pretax, the money in the accounts grows tax free and withdrawals for qualified medical expenses are tax free.

But most holders aren't taking full advantage of their accounts and are missing out on substantial rewards, new data indicates.

The average account holder has a modest balance, contributes far less than the maximum and does not invest their HSA, according to a report from the Employee Benefit Research Institute (EBRI). Just 12 percent of people with an HSA use it to invest in assets other than cash.

The analysis from the Washington, D.C.-based nonprofit independent research organization examined a database containing information on more than 13 million HSAs.

HSA funds do not have to be used by a certain time, so if left untouched, money can compound. The tax benefits of HSAs are maximized when account holders contribute the statutory maximum, minimize withdrawals for current medical expenditures and invest their HSA balances in assets other than cash. But most employees with HSAs use them as a cash or checking account fund, explained Jake Spiegel, research associate, health and wealth benefits, at EBRI.

"Average contributions are well below the statutory maximum. Most account holders take a distribution from their HSA, and relatively few account holders invest," he said. The average combined HSA contribution in 2021 was $927 less than the maximum contribution for individuals allowed for that year, and $4,527 less than the maximum contribution for account holders with family coverage, EBRI found.

In 2023, employees can contribute up to $3,850 into their HSA; those with family coverage can contribute up to $7,750.

Yet some HSA users are making some progress. Even with increased health care spending in the wake of the COVID-19 pandemic, average balances in HSAs have increased since 2020, rising from $3,622 to $4,318 in 2021. In other encouraging news, the share of account holders who invest their HSAs has steadily risen since EBRI began analyzing its has database nine years ago, Spiegel said.

What does all this mean? In part, it might indicate employers, and HR and benefits leaders in particular, can do a better job talking with their employees about how to get the most out of their HSA. Other research finds that employees are often unsure of how to use their benefits, and most don't understand or are confused about benefits, including HSAs. For instance, a 2021 survey by the Plan Sponsor Council of America found that while half of employers offer HSAs in their benefits package, 69 percent of employees are not clear on the benefits or their uses.

EBRI's data "does suggest that the longer someone has had their HSA, the more likely they are to take better advantage of the considerable tax benefits they offer; they're more likely to contribute more, and they're more likely to invest their HSAs in assets other than cash," Spiegel said. "This could be because employees need some time to figure out how HSAs best fit into their personal finances."

Employers can help nudge employees in the right direction while also informing employees of other advantages of the accounts. In addition to tax benefits, HSAs also allow account holders to roll over their balances from year to year to accumulate more savings for future medical expenditures, as well as medical expenditures in retirement.


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