HSAs and 401(k)s – better together? What advisors need to know

New survey results show that financial advisors have an opportunity to educate employers about how a health savings account can be part of a retirement plan rather than simply a spending account. More than half of large employers either currently position HSAs as part of a retirement savings strategy to employees or plan to do so in the future.

“Incorporating HSA education as part of a broader financial wellness program throughout the year with multiple touch points, perhaps alongside your retirement plan education, would go a long way toward reframing HSAs,” says Ann Brisk, director of strategic partnerships at HSA Bank. “It is encouraging to see data documenting the expansion of these valuable resources across a wide variety of employer sizes and worker populations.”

The Plan Sponsor Council of America’s 2022 Health Savings Account Survey, sponsored by HSA Bank, reported on the 2021 plan year experience of more than 450 employers.

“The availability and use of HSAs continue to grow, and while there is still a lot of variability dependent on how involved in the HSA program the employer is and by organization size, some consistent trends are beginning to emerge,” according to the survey report. “Most organizations make contributions (and most do so by coverage level), but for the most part employees are still using HSAs as a spending account and employers continue to struggle with explaining HSAs to employees.”

A key design strategy employed by more than four in 10 respondents is the use of automatic enrollment, up from 35.3% in 2020 and 32.2% in 2019. Automatically opening HSAs and enrolling employees dramatically increases the savings rate. This includes more than half of small organizations that automatically open an HSA for employees when they enroll in the high-deductible health plan. Moreover, nearly six in 10 allow rollovers from HSAs for newly hired workers, and nearly two-thirds educate and encourage rollovers from other HSAs — moves that support the growth of these savings accounts.

These programs are the only ones that provide a triple tax advantage for health-care expenditures, offering the same pre-tax savings advantage and tax deferral on investment growth as 401(k)s but also allowing for the tax-free withdrawal of those funds for eligible health-care expenses.

These supportive structures notwithstanding, education remains a significant challenge for employers who sponsor and look to encourage participation in these programs. Yet most employers provide education about HSAs only during open enrollment (61%) or when onboarding employees.

Related: Employees perplexed by HSAs? Using targeted messaging is key to enrollment

One notable area where the design of most HSA programs differs from 401(k) programs is investable account assets, because HSAs still are largely treated by participants as short-term spending accounts for health care. Just 20% of account holders invest their assets in something other than money market funds, where a $1,000 minimum cash balance remains a threshold for directed investment by more than 80% of responding organizations.

Among the other key findings from the survey:

• The average participant contribution in 2021 was $2,483, down from recent years.
• The average account balance at the end of 2021 was $4,924, down from $6,318 in 2020.
• Three-fourths of employers make HSA contributions, and most provide a set amount per coverage level.
• More than 20% of participants invested assets in 2021, accounting for nearly 30% of HSA assets.
• Nearly 70% of respondents indicated that employee education is a top concern, with half or respondents indicating it is their primary concern regarding their HSA programs.
• Compliance, Medicare eligibility and difficulty of administration are the top secondary concerns.
• The top education priority for more than half of survey respondents is explaining HSA tax preference, followed distantly by explaining contribution limits.
• More than 40% of organizations automatically enroll employees in an HSA if they enroll in the HSA-qualifying health option, up from 35.3% in 2020 and 32.2% in 2019.
• Fewer than 30% of employers position HSAs as a retirement savings vehicle.
• More than half of organizations cover HSA maintenance fees themselves. Fees generally are assessed monthly (79.4% of plans) and cost less than $3 a month for each participation on average.

“The uncertainty of future health-care expenses is a significant concern for many,” said Hattie Greenan, director of research and communications for the association. “HSAs can be an important part of a holistic retirement savings approach to address these concerns.”