HSAs for all: Unleashing the potential of health savings accounts

Many benefits brokers, HR benefits managers, and retirement advisors realize the potential of Health Savings Accounts (HSAs). They might see them as a way to sweeten high-deductible health plan sales, or save on health care costs while aiding employees, or provide expertise in guiding the investment side of the accounts, or help in saving for retirement.

But despite the interest, there’s still some confusion as to what HSAs actually are and how they can be used. When you add to that the growing movement to “unchain” HSAs from their high-deductible health plan requirement, it’s even more important to understand what HSAs are now and what their potential is for the future.  For perspective, we turned to Shobin Uralil, the COO and Cofounder of Lively, a Health Savings Account (HSA) platform for employers and individuals.

BenefitsPRO: Recent surveys seem to show that employers and employees don’t understand HSAs. Why not?

Shobin Uralil: Year over year, HSA providers struggle to educate prospective and existing account holders on the benefits the accounts offer. The reason that an education gap remains is not due to a lack of trying, but a lack of analysis by the industry — the real issue is that there is no average HSA account holder, and the industry’s understanding of what the typical HSA account holder looks like is wrong.

Consequently, education efforts fail. Individual health saving and spending needs vary greatly. A personalized approach is the only way to combat these concerns and deliver a modern, impactful HSA experience.

We recently published our first annual HSA Persona Report. We found that the first step to better understanding an account holder is by incorporating predictive engagement based on transcending persona movement over time and life stages of an HSA. Using that to create dynamic account and marketing engagement based on predictive movements will enable account holders to get more from their HSA. This will break the education inertia that has been spurning HSA growth.

In order to fully activate HSA growth potential, on top of education, long-held industry practices like minimums, cash balances, fees to invest, and hidden transactional fees hinder the account holder and overall account growth. That costs the account holder and provider money and slows industry growth. By removing those access costs, account growth will increase at their full potential.

What are some ideas for how to frame HSAs for employers and employees?

Employees often select their health plan without understanding how it will impact their health savings options. This understanding is crucial. We found that less than 1 in 3 Americans understand common health care terms.

HSAs are currently limited by health plan eligibility (more on that below). But based on current requirements, it’s crucial employers package HSAs and health care.

Oftentimes when you look at the health care premium difference and the tax savings, it will make a lot of sense for many employees to choose an HDHP coupled with an HSA, even if that means they are paying a higher fee for medical expenses before deductible.

Start with the HSA and outline its tax-savings benefits for health care spending, savings, and investing. Then employees can make an informed health plan decision.

Employers should remind employees that HSAs live in both the health care and retirement benefits space. Don’t talk about retirement without mentioning traditional vehicles, like a 401(k) and more ‘stealth’ offerings like an HSA. The flexibility and tax-advantages of an HSA allow them to create savings and spending options for this year and well into retirement. After the age of 65, an HSA can be used in the same way as a 401(k), except that HSAs don’t require mandatory distributions.

The ways employees approach their savings is up to them, and an HSA allows for more tax-free savings. HSAs are truly the only way to save for long-term health care costs — ensuring employees know this is critical.

What is the relationship between HSAs and HDHPs?

HDHP adoption is representative of the ever-changing health care market. HDHPs offer more flexibility and lower premium costs (for both employers and employees). Clearly, cost accelerations in health care are directly driving HDHP adoption. It’s the only way for employees to limit their paycheck deductions and still be covered for major medical costs.

HSA growth is based on HDHP growth, not the reverse. HDHP growth is based on cost savings, job market competitiveness, and increased awareness. Twenty-eight percent of HR professionals indicate that offering a consumer directed health plan (CDHP) is the best activity for successfully controlling their organizations’ health care costs. And in 2019, 59% of employers offered an HDHP linked to a health savings or spending account.

It’s also important to note that not all HDHPs are HSA-eligible. Annually, the IRS redefines what it considers an HSA-eligible HDHP (adjusting for inflation).

We’re hearing talk of the need to “emancipate” or “unchain” HSAs from HDHPs. Is such a thing possible? What would be required to do so? 

To remove the HDHP requirement from an HSA would take an act of Congress. There have been and are currently multiple bills active before the House and Senate that would either expand HSA eligibility or fully remove the health plan requirement.

Right now HSAs are only available to those covered by an eligible high-deductible health plan, which locks out more than 180 million Americans and their families from a critically needed savings and investing opportunity. We believe the need for help with health care costs is ever present and amplified in these uncertain and unpredictable times. We can and should change this and offer HSAs for every American.

What effect would ”unchaining” the HSA from an HDHP have on employee financial health?

There are already over 29 million HSA account holders in the United States who have saved more than $73 billion in pre-tax HSA funds. The average American now spends over $5,000 per year in out-of-pocket health care costs. That’s over $1.65 trillion per year. Not only that, but despite rising health care costs, the average deductibles in the U.S. for all plans are greater than the IRS limits for an HSA-eligible plan.

Arcane tax laws prevent people from saving with an HSA. Furthermore, expanding HSAs to every American, regardless of health plan type, can create nearly $300 billion in pre-tax dollars for health care expenses in the first year. With more money saved up for potential health care costs, health savings account holders will be more prepared to meet the future, however unexpected or unpredictable it may be.

And if you think these extra funds are just nice to have, what you are missing is the understanding that out-of-pocket health care costs now total $295,000 for a couple in retirement. That is on top of current Medicare coverage.

The importance of adding the HSA as an option for every American is to save for these costs. Without an HSA, Americans are forced to deplete their retirement savings to pay for health care costs, thereby widening the retirement gap. COVID-19 has accelerated these negative costs trends. It’s more important than ever to remove the health plan restriction for HSAs.

HSAs offer a direct and dedicated path for Americans to save for current and future health care costs. It will offer immediate savings options, cost-relief, and peace of mind for many Americans.