Designed to cover consumers’ out-of-pocket health care costs, HSAs are offered in tandem with qualified high-deductible plans. The Employee Benefits Research Institute estimates that in 2014, there were about 13.8 million HSA accounts holding more than $24 billion in assets. Nearly four out of five of those accounts were opened in 2011 or later.
Most health care economists expect the brisk adoption of HSAs to continue. Benefits consultancy Mercer predicts that 36 percent of employers with 10 to 499 employees will offer HSA-eligible plans by 2017; 66 percent of employers with more than 500 workers are expected to do the same. Moreover, the consultancy estimates that by 2017, 18 percent of larger employers will offer high-deductible plans as their only option.
This is good news for benefits brokers looking for a way to add value to voluntary benefits – using an approach that that employers and employees may not have considered. To better understand how voluntary policies can benefit HSA account holders, though, we must look at how savers are using their HSAs.
Few contributing maximum to HSAs
A study by HelloWallet, which provides financial wellness tools and benefits platforms to employers, showed that only 5 percent of HSA account holders contributed the annual maximum allowed by the IRS in 2013.
In 2016, annual contribution limits to HSAs are $3,350 for an individual and $6,750 for a family (limits have increased marginally since 2013).
Among account holders who contributed in 2013, the mean deferral was $700, according to HelloWallet’s study, which called the low contribution rates “potentially dangerous” for account holders facing large medical bills.
Because HSA assets do not have to be spent, they can be rolled over year to year, allowing tax-deferred assets to accrue over time. EBRI data shows the average account balance at the end of 2014 was $1,933. Levels varied significantly by age: For participants under age 25, the average balance was $655; for participants over age 65, the average balance was just over $5,000.
Out-of-pocket expenses
The significance of this balance shortfall is that consumers simply aren’t saving as much as they need to offset the higher deductibles on their health plans. EBRI’s data shows that the average account balance for HSAs is actually lower than the average deductible for HSA-qualified consumer-driven plans, which for single coverage was $2,196 in 2015, and $4,347 for family plans, according to the Kaiser Family Foundation’s 2015 Employer Benefits Survey.
And therein rests the argument for strategic voluntary offerings, says one advocate for voluntary products.
“It takes a while for people to build up HSA account values, especially for younger workers,” said Jeff Oldham, vice president of Benefitfocus, a provider of cloud-based benefits platforms for large employers.
“For a lot of people with HSAs, the money simply isn’t there to cover out-of-pocket costs,” he added.
For consumers, affordable voluntary products can provide protection that many HSA accounts can’t, said Oldham. As such, employers can offer voluntary benefits as a way to help employees grow their HSAs.
By using voluntary benefits to pay for uncovered expenses rather than exhausting balances for out-of-pocket costs, those accounts can grow over time and cover more expensive medical conditions that may arise later in life. But many employers are unaware of this strategy, creating a significant opportunity for benefits brokers to educate their clients and clients’ employees.
HSA investment options
The vast majority of HSA assets sit in bank CDs and other low-yielding accounts. But about 6 percent of accounts are invested more aggressively in accounts that function like 401(k)s. This allows employees to invest and grow account contributions more than ever before.
Not surprisingly, such accounts grow far more quickly than traditional HSAs, according to EBRI data. At the end of 2014, 37 percent of HSAs associated with investments held more than $10,000, compared with only 4 percent of HSAs in traditionally designed accounts. Among HSAs with investments opened in 2005, the average account balance was more than $19,000 by the end of 2014.
By pairing voluntary benefits with investment-based HSAs, then, Gen Xers and pre-retirees can more effectively save and build on account contributions. For workers leaving the workforce in 2016, retirement providers project medical expenses in the hundreds of thousands of dollars over the course of retirement.
Brokers, then, stand at the forefront of an evolution in consumer-driven plan design. The broker’s ability to communicate how younger workers can use voluntary benefits to grow their balances and older employers can use them with an eye on retirement is key to this turning of the tides.
As Oldham suggested, pairing voluntary benefits with HSAs is an innovative strategy that could better protect employees’ interests, and better serve the employers that want to deliver the most cost-efficient protection for workers.
“The average American doesn’t have thousands of dollars to pay for a catastrophic medical event,” said Oldham. “That’s where voluntary benefits can step in to do what HSAs can’t for so many employees, especially newer entrants in consumer-driven plans.”
But too many employers have yet to “connect the dots,” he added. That’s now up to brokers.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
