While many banks might offer HSAs, those that specialize might have a strong relationship with the HDHP carrier, he says, “resulting in discounted services. In other situations where plans are self-insured, the third-party administrator may also have a strong relationship with a financial institution. HSA funds can also be invested in other types of securities, which requires high quality professional guidance.”
Not For Every Client
Still, HSAs aren’t necessarily appropriate for every client. “HSAs don’t seem to make sense for families who need frequent and/or specialized medical care,” observes Brian Spinelli, a senior wealth advisor at Halbert Hargrove in Long Beach, Calif. Rather, he says, they are best for “healthy people who don’t use the doctor often and want to keep more of their premiums.”
Assessing whether they’re right in a particular situation can be tricky. “Illness is unpredictable and could end up costing someone with a high deductible plan more than someone with traditional health insurance,” says Tim Hewitt, a senior wealth advisor at the Wiley Group in Conshohocken, Pa.
Another concern of his: Some people focus so strongly on HSA savings that they neglect their own health. “People can feel pressured to grow these accounts, which can limit the desire to use funds for care,” says Hewitt.
Other Caveats
There are other potential shortcomings. For one, not all states allow an income-tax deduction for HSA contributions. “For example, California doesn’t allow the pretax contribution to reduce your state income taxes,” cautions Spinelli.
Another drawback, he says, is an added degree of complexity. “You must show your insurance card and pay with an HSA card when you visit the doctor,” he explains. “Medication can cause another issue as those costs are included in reaching the high deductible. Patients can end up with a surprise if they don’t understand how medicine should be paid for under the high-deductible plans.”
What’s more, although the list of qualified medical expenses is extensive, any withdrawals for other purposes are taxable and may be subject to a 20% penalty. “It can be expensive to access these accounts for non-health-care purposes,” says Baird’s Steffen. “The 20% penalty is waived once you reach age 65, however.”
A Growing Employee Benefit
Despite the complexities and limitations, more and more employers are offering HDHPs and HSAs to employees as benefits. “About 50% of employers nationwide offer HSAs,” reports Steve Christenson, executive vice president at Ascensus, a provider of retirement and college savings plans. “As you might expect, the offering improves as the size of the employer increases. This follows a parallel pattern for employers adding an HSA contribution on behalf of their employees.”
Some employers go even further. They “seed HSAs with contributions to help employees start a savings plan,” notes Harvey Cotton, a principal in the tax and benefits practice at Ropes & Gray, a Boston-based global law firm. Others, he says, also “ask employees to focus on the premium savings each month as a means for those employees to start contributing to their HSAs directly out of their paychecks. Once employees start contributing from this premium savings, it may be easier for them to contribute on an ongoing basis.”
But employers and employees alike often need to be brought up to speed. “Those who are not well informed may not save enough in [their HSAs] to cover the high deductibles,” says Thomas Mingone, managing partner at the Capital Management Group of New York. HSAs, he adds, require “the discipline to save the difference.”
Not Without Controversy
Despite widespread support, HSAs are clearly not entirely free of controversy. Critics charge that they unfairly benefit the affluent—a reputation that Evan Powers, a certified financial planner at Cypress Financial Planning in Charlottesville, Va., dubs “probably somewhat deserved.”
Powers holds that HSAs are “amazingly useful” and offer more advantages than people may realize, but they do tend to favor those who can afford the risks inherent in carrying a higher deductible, those who “can afford to effectively self-insure at lower levels of medical expenses,” he says. “Furthermore, since the benefits of HSAs come purely from tax savings, their benefits are also much greater for those whose tax brackets are already high.”
On the other hand, many average folks who could benefit from HSAs don’t. “Voya’s research found that only 6% of baby boomers plan to utilize an HSA to pay for health-care expenses not covered by Medicare,” notes Mike Berry, a Des Moines, Iowa-based certified financial planner at Voya Financial. “This is such a huge missed opportunity, especially for low- to middle-income individuals.”
Voya doesn’t necessarily advocate HSAs over other retirement vehicles, Berry hastens to add, but it does advocate for better financial education and understanding.
“Middle-market families need to utilize all the tools available to them if they want to have a good chance of covering out-of-pocket health-care expenses in retirement, which are estimated to be about $260,000 for the average couple,” he says. “Advisors and employers need to reinforce the need for middle-income individuals to maximize this benefit.”
Given the current political turmoil, though, perhaps it’s surprising that HSAs have remained largely safe from partisan rankling. “[They’ve] grown dramatically since their inception, through Republican and Democrat administrations,” affirms Dr. Kathryn (Katy) Votava, founder and president of Goodcare.com, a health-care advisory in Rochester, N.Y.
Still, in this ever-changing regulatory environment, it’s prudent to “keep educated and know where to go to get questions answered,” she says. Clients shouldn’t worry, however. “So many other aspects of the health-plan marketplace have changed over time,” she says, “[but] HSA regulations have changed very little.”