The $100 billion health savings account (HSA) industry offers some significant financial planning opportunities for advisors and their clients, as only about a third of industry assets have been invested, an HSA specialist said.
As of the end of 2021, there were some 32 million HSA accounts in the U.S., with more than $100 billion in assets, said Peter Stahl, founder of consulting firm Bedrock Business Results in Wayne, Pa., and a certified financial planner and healthcare specialist. However, only $34 billion of that has been invested.
“That’s a lot of money sitting in cash out there,” he said during a presentation at Schwab Impact 2022 earlier this month. “This breaks down into two categories: those that I call accidental accumulators and those who are doing deliberate planning.”
Deliberate planners, he said, are recognizing how these accounts can be used, and who are getting advice from an advisor. “And what is happening there is tremendous.”
Increasing healthcare costs are driving growth in HSA usage, Stahl said. By 2021, the average annual premiums for employer-sponsored health insurance had risen to $7,739 for a single person and $22,221 for a family, he said.
“Not only is it very expensive, but the price increases have been crazy,” he said, noting that family coverage has increased 22% over the last five years and 47% over the last 10 years. “This is one of the biggest challenges that we face when it comes to saving and investing money as a nation.”
Several other important savings buckets—like retirement, a home purchase, or college education, or all three—get moved down the priority list because of the cost of healthcare, he said. Health plans with high deductibles (and lower premiums) have brought some relief, but the real benefit to consumers that can accompany qualifying high-deductible plans is the use of health savings accounts.
They’re not a universal solution, Stahl said, as some consumers need first-dollar coverage based on the state of their health and not all insurances are qualifying. But for those clients who can use one, an HSA is a tax-advantaged savings and investment account used for medical expenses.
To qualify for an HSA, family medical coverage needs to have at least a $2,800 deductible with a $14,100 maximum for annual out of pocket expenses, and individual coverage needs at least a $1,400 deductible with a $7,050 maximum for out of pocket expenses.
For this year, contributions limits are $3,650 for individual coverage ($3,850 for 2023) and $7,300 for family coverage ($7,750 for 2023). In addition, there’s a $1,000 catch-up provision for account holders 55 years old and older.
The ways HSAs are tax-advantaged start with contributions going in through payroll deductions before federal, state and FICA taxes are applied. The earnings—interest, dividends and capital gains—grow tax free. And then withdrawals for healthcare expenditures are also tax free.
“If you’ve been around this industry for a while, you know there’s not a lot of those triple tax-free plans left where you get the deduction going in, without any income limits, you get tax-free growth, and then you can pull the money out, income tax free,” Stahl said. “You should never have a taxable distribution from an HSA.”
There is a penalty for making withdrawals for non-medical expenses in that the withdrawal would be taxed, and there’s 20% penalty on a withdrawal for account owners under 65.
The trick to using an HSA for wealth building is to fund the account to the maximum possible, invest for growth, use other funds to pay for medical costs, and then use a look-back allowance to spend down those HSA dollars at a much later date after they’ve generated additional wealth, Stahl said.