Few Participants Invest Their HSA Funds

Health savings accounts with invested assets are substantially larger than others

By Stephen Miller, CEBS Jul 17, 2015

updated 8/31/2015

Average health savings account (HSA) balances increased from $1,408 to $1,933 (up about 37 percent) in 2014, according to a July 2015 report by the nonprofit Employee Benefit Research Institute (EBRI). But accounts that invested at least some of their assets were considerably larger than HSAs that kept strictly to money market funds, though relatively few HSA holders are pursuing available investment options.

A follow-up August 2015 report from EBRI provided additional findings that HSAs with investment options tend to draw larger contributions and have higher balances.

Contributions to HSAs are deductible from taxable income (or can be made through payroll deductions with pretax dollars), and distributions for qualified medical expenses are not counted as taxable income. Any interest or other capital earnings from the account build up tax free as well.

Starting from nothing about a decade ago, enrollment in HSA-eligible high-deductible health plans is estimated to be about 17 million in 2014. The number of employers expected to offer an HSA-eligible health plan—either as an option or as the only health care plan—is expected to continue to increase.

“HSA-eligible health plans and HSAs are expected to grow as a vital component of employment-based health coverage,” said Paul Fronstin, director of EBRI’s Health Research and Education Program and author of the two reports.

Employer Contributions

EBRI's findings regarding employer contributions to HSAs showed that:

On a yearly average, individuals who made contributions deposited $2,096 to their account.

Among accounts that received an employer contribution during the year, the employer contributions averaged $1,021.

“The average annual individual contribution was higher in HSAs that did not have an employer contribution,” Fronstin noted. “Among HSAs with employer contributions, annual individual contributions averaged $1,803. They averaged $2,693 in accounts that did not have employer contributions. This suggests that, on average, individuals view employer contributions as a substitute for their own contributions.”

Invested Accounts Grow Larger

EBRI researchers found that among existing HSAs:

Individuals contributed $2,636 annually on average when they had made investments within their HSAs, and $1,224 when they did not have investments.

End-of-year account balances averaged $10,261 among HSAs with investments, but just $1,709 in HSAs without them.

“Some HSA owners may use the investment-account option as a means to increase savings for retirement, while others may be using it for shorter-term investing,” Fronstin commented.

This was the first year the EBRI HSA Database contained usable data on accounts with investment assets. Funds invested through an HSA in stock or bond mutual funds can grow significantly overtime, just like funds in a 401(k), but face short-term volatility, including declining stock prices that can last up to several years.

Only about 6 percent of HSA participants choose to save some of their HSA funds in an associated investment account, EBRI found. However, end-of-year balances were much higher in accounts that used investment options than in accounts that did not use investment options:

37 percent of HSAs with investment assets ended 2014 with a balance of $10,000 or more, whereas only 4 percent of HSAs without investment assets had such a balance.

Among accounts that were opened just in 2014, end-of-year balances last year averaged $6,544 in accounts with investment assets and $895 in accounts without investment assets.

Among accounts opened back in 2005, end-of-year 2014 balances averaged $19,269 in accounts with investment assets, and $6,063 in accounts without investment assets.

Missed Opportunities

A separate July 2015 report looking at how HSAs are financed, by financial advice firm HelloWallet, showed that only 4 percent of account holders eligible to invest their HSA balances actually chose to invest, and that only about 5 percent of account holders contributed the maximum amount allowed by the IRS to their HSA. (For 2015, employees with individual coverage only can contribute $3,350 and those with family coverage can contribute $6,650; individuals age 50 and older during 2015 can contribute an additional $1,000.)

HelloWallet found that HSA holders with a college degree invested money in the account three times as often as those without a college degree. Investors also were wealthier than noninvestors, and men were more likely to invest their HSA funds than were women.

“Account holders who do not wish to use their accounts as spending vehicles in the immediate future are missing an opportunity to grow their health savings through interest and investment returns,” the report stated. “Inactivity allows their account savings to be eaten away by inflation.”

The report noted a number of barriers that may be preventing HSA holders who can afford to save for future health care needs from investing their funds:

Account holders typically must deposit at least $1,000 into their HSA before they are eligible to invest their funds.

Account holders must actively select to invest their funds, and choose among investment offerings. "This additional bit of friction all but ensures that some individuals who may not be quite as engaged with their personal finances will not make the extra effort to open a brokerage account within their HSA and change their investment elections," the report surmised.

HSA investment options "may not be well-known among employees, even though it is one of the biggest differentiators from FSAs [flexible spending accounts]." This presents an opportunity for benefit managers to educate participants about the value of investing HSA assets over time, if they can afford to do so.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow Me on Twitter.

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