With more $40 billion in total
assets, health savings accounts are starting to add up to real money, which
could represent another area of opportunity and responsibility for financial
Today, only about 4% of HSA
savers are moving money out of safe investments and investing it in the
financial markets. But as account sizes grow, more aggressive investing is
expected to become more common inside these tax-friendly accounts.
Designed as a way to help people
in high-deductible health insurance plans manage their out-of-pocket expenses,
the popularity of HSAs has ballooned over the past 10 years.
And as more companies opt for
high-deductible plans that give consumers more control over health-care
spending, HSA assets are expected to continue to climb.
Total HSA assets have increased
by 2,200%, from $1.7 billion in 2006, according to research compiled by
HSA assets are projected to hit
$44.5 billion at year-end 2017, and $53.2 billion at the end of 2018.
The accounts, which offer
tax-free contributions, gains and withdrawals for qualified medical expenses,
gained popularity following the 2010 passage of the Patient Protection and
Affordable Care Act, which led to an increase in high-deductible insurance
As account sizes have grown, so
has the percentage of assets being invested in the markets.
At the end of last year, $5.5 billion,
or 14%, of the $37 billion in total HSA assets was allocated to investments
beyond cash management instruments. That compares to $1 million, or 6%, of the
$1.7 billion in 2006.
"If you're forced into a
high-deductible plan, you should be taking full advantage of an HSA," said
Eric Roberge, founder of Beyond Your Hammock.
"There is no other account
that is tax-free both in and out," he added. "I tell people, after
the company match is met in their retirement account, they should max out their
HSA because it is that beneficial."
To contribute to an HSA, an
individual must have a health insurance plan with an annual deductible of at
least $1,300, which doubles to $2,600 for a family.
The maximum annual
contribution is $3,400 for a single and $6,450 for a family, and includes
an additional $1,000 per year for anyone over age 55.
While HSAs were not
originally designed as tax-management vehicles,that feature is particularly
appealing to people who can afford to make the contributions.
"It's an area that will
continue to grow," said Heather Larsen, an associate analyst at Morningstar
Inc., which published a report last month analyzing HSAs as
"It's a budding industry
with lots of potential for growth," Ms. Larsen added. "A lot of people
view them as a health-care spending vehicle, but they are also great
The ability to contribute pre-tax
dollars and enjoy tax-free gains makes HSAs especially suited for "young,
healthy families," according to Mr. Roberge.
"The best part is actually
the investing because you get tax-free compounding over many years," he
said. "If you can pay your current medical expenses out of current cash
flow and invest the HSA money, you end up making out a whole lot better than if
you use the HSA money for current medical expenses."
According to Devenir, accounts
opened in 2006 are averaging around $7,500, compared to an average account size
of $1,200 for accounts opened last year.
But the trend is toward more
assets staying in the accounts, which leads to more investment potential.
Devenir data show that $25.5
billion was contributed to HSAs last year, while $19.8 billion was withdrawn
for medical expenses.
That compares to 2011, when $10.9
billion was contributed and $8.3 billion was withdrawn.
Some HSAs restrict investing in
the account until a minimum balance is reached, usually around $2,000.
Brett Anderson, president of St.
Croix Advisors, a $40 million advisory firm, does not believe investors should
get too aggressive when investing HSA assets.
"The purpose of that money
is to cover medical expenses," he said. "I would say, invest safely,
because this is a short-term bucket and bad things can happen."
Meanwhile, Eric Dostal, a
financial adviser at Sontag Advisory, a $4 billion firm, believes HSAs could
become "the new IRA."
"If you use it the right way
you will never have to pay taxes on the money," he said.
Aaron Pottichen, president of CLS
Partners, a consulting firm that helps companies set up health-care plans, said
the HSA market is just starting to take shape as an investment strategy.
"The idea of an HSA as a default
savings account has really taken off, but how you invest that account is very
much dependent on the provider," he said. "The theme of them being
used as investment accounts has picked up steam in the past few years, and that
has a lot to do with the growth of high-deductible health insurance
here for the original article from InvestmentNews.