Experts answer questions about HSAs

Will they ever be unbound from high-deductible plans? Should participants invest or spend HSA funds? What are the latest trends for employers to know?

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Have you ever received an expensive veterinary bill and wished you could use Flexible Spending Account or Health Savings Account funds to pay it? While not possible today, it’s not outside the realm of possibility, although there are complications with the idea.

Will there be HSAs for pets?

“The IRS has taken a more expansive view of eligible HSA expenses post-COVID,” said James Bornhorst, Co-Founder and CEO of First Dollar. “One complication is HSAs can only be used for dependents on a family’s tax return, and pets don’t have a formal dependent status in the eyes of the IRS.”

While we wait to see if health-related expenses for furry family members eventually could be covered under HSA plans, other HSA-related evolutions and trends are changing the way employees think about balancing paying for medical expenses while growing their retirement savings. We asked experts about the potential evolution of HSAs, including whether we will ever see unbound HSAs offered without high-deductible health insurance plans.

Will we see HSAs not tied to HDHPs?

Anne Brunson, Vice President of Service Operations at Maestro Health, a tech-enabled third-party administrator of health and benefits, noted it’s already possible to open an HSA with a self-funded employer or individually with some banks. Preparing for unknown medical expenses in the future while also saving for retirement doesn’t necessarily need to be tied to a health plan, she said.

“We may see unbound HSAs,” said Brunson. “As of now it is a requirement of the IRS for the money to be put in pre-tax. If they were to loosen that restriction and just keep a max limit contribution like a 401(k), we could really see HSAs taking off.”

There have been several attempts over the years by advocates to expand access to HSAs, including the elimination of the high-deductible health plan requirement, said Rich Ward, managing director at TIAA Health Solutions. The most recent effort came in 2020 as a part of the COVID-19 relief packages.

“HSA advocates continue to fight for expansion, especially for Medicare beneficiaries, who are precluded from making HSA contributions simply because they are enrolled in Medicare,” said Ward. “There are several hurdles that will need to be addressed if the high-deductible health plan requirement for HSA contributions is to be eliminated.”

Among those hurdles are a perceived shift of costs to workers, concerns that individuals will be unable to afford their deductible and therefore forego necessary treatment or medication, a perception that HSAs are simply a tax shelter for the rich, and finally the cost to the federal government’s tax revenue, said Ward.

“Arguably, these concerns can all be overcome,” said Ward. “Nevertheless, they are real concerns for policy makers in Washington, D.C., and, therefore, it appears unlikely that the HSA will be separated from the high-deductible health plan in the near term. HSA advocates will undoubtedly continue efforts to expand HSA access to help all Americans dealing with rising healthcare costs.”

Should one spend or invest HSA funds?

Another common question about HSAs is whether participants should spend their HSA funds or invest them.

“Both spending and investing with HSAs are valuable ways to save money,” said Bornhorst. “If your household income is on the higher side and you’re already maxing out other retirement accounts like 401(k)s, then typically it’s better to invest your full HSA contribution each year and pay for any healthcare expenses with post-tax money. This approach lets your HSA contributions grow tax-free. If you save your healthcare expense receipts, you can reimburse yourself from your HSA at any point in the future.”

Ward said the answer depends on the account holder’s personal situation, but for most people, saving and investing their HSA may be the better strategy. Paying current out-of-pocket medical expenses on a pre-tax basis is advantageous, but since high-deductible health plans cover 100 percent of preventative services (not subject to the plan deductible), it is possible that an individual may not have to dip into their pocket unless something unexpected happens.

In the long run, since an HSA is triple tax-advantaged (pre-tax contributions, tax deferred growth and tax-free withdrawals for eligible medical expenses), the HSA will accumulate rapidly if not spent for those who can afford to pay their deductible with other resources, said Ward. 

“This allows you to take advantage of the tax deferred growth in the HSA which can help pay for medical expenses in retirement,” said Ward. “The fact is, many HSA-eligible individuals do not contribute the maximum amount each year. But if you can afford to do so, you may find that you’re able to spend some of it on unanticipated medical expenses while saving and investing the rest for future use.”

Ward noted HSAs are even more advantageous than retirement accounts such as IRAs or a 401(k) because they can be used tax-free at any time on out-of-pocket medical expenses or saved for use in retirement.

When an HSA account holder turns 65, they can use their HSA for any reason without penalty, which places the HSA on par with the IRA or 401(k) in retirement while preserving the tax-free utilization for qualified medical expenses throughout retirement. What’s more, the HSA is not subject to a forced minimum distribution the way IRAs and 401(k) accounts are, said Ward.

What trends are emerging around HSAs?

The current trends around HSAs are largely focused on awareness and education as employers adopt programs to assist workers with their finances. Employers are implementing financial wellness programs to help employees with such things as establishing an emergency fund, student and consumer debt, college savings and even mortgage loans, and HSAs are a major element to financial wellness, said Ward.

“Historically, HSAs have been confused with medical flexible spending accounts (FSA), which need to be spent down each year, and originally there were no investment options to choose from within HSAs,” said Ward. “These days, just about every HSA administrator offers mutual funds and/or a brokerage option. We’re now increasingly seeing HSAs that are integrated with an employer’s retirement plan or 401(k) platform provider. This makes it easier for employees to plan, save and invest their HSAs in a similar way that they have invested their retirement accounts.”

Brunson said she sees an expansion of participation in HSA plans as more and more people realize they benefit more than just high-risk patients. As younger generations continue to educate themselves about financial wellness, the ability to set aside funds for health events before taxes is almost a no brainer, she said, and employers who offer HSAs will stand out to candidates as a company that cares about the physical, mental and financial wellbeing of its employees.

“In the future, I see HSAs being offered across the board as a part of employers’ health plans and the majority of people taking advantage of the tax break,” said Brunson. “As more innovative and affordable healthcare services become available, it’s a great signal that the industry is moving in the right direction – and HSAs are a good example of this.”

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics.

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