Few Investors Grasp Long-Term Potential of HSAs

Given the tremendous health care costs people will face in retirement, HSAs can be a significant tool.

Most employees who have access to health savings accounts (HSAs) mistakenly think these work like flexible spending accounts (FSAs)—if they don’t use their balance in a given year, they will lose it. Thus, the majority of HSA holders use them only for current health care expenses. This is according to a new report from UMB Healthcare Services, “HSAs Build Long-Term Wealth with Tax-Favored Savings.”

That misconception is not surprising, given the fact that HSAs are still fairly new and are rarely included in benefits education and communications, writes Dennis Triplett, chairman of UMB Healthcare Services, in the report.

UMB analyzed the balances of 440,000 HSA investors in 2014 and found that they had an average balance of $1,874—far lower than the annual maximum contribution the Internal Revenue Service (IRS) allows. For 2015, the limit is $3,350 for individuals, $6,650 for family coverage, plus a $1,000 catch-up for people over 55 years old.

Given the fact that the Employee Benefit Research Institute (EBRI) calculates that a couple retiring at age 65 today will need nearly $300,000 to cover their health care costs in retirement, retirement plan advisers should emphasize the benefits of long-term investing and maximizing HSAs, UMB Healthcare Services suggests.

For instance, UMB projects that a 40-year-old employee earning $80,000 who starts to maximize his HSA contributions and earns a 5% return will have more than $306,000 by age 65. UMB also notes that whereas 401(k) investments and withdrawals are tax deferred, they are not taxed in an HSA.

UMB suggests that advisers can help their sponsor clients to look for HSAs that offer robust investment options and proactive education.

In conjunction with the white paper, next month, UMB will launch a tool for HSA investors called UMB HSA Saver—a dashboard that will show account holders their current investments and enable them to research other investment options.

The UMB report comes on the heels of a report from AvidaBank that predicts a wave of investing in HSAs that will boost assets from $3 billion invested today, to $12 billion in 2017 and $40 billion in 2020.