Just 5% of employees contribute the maximum allowable amount to their health savings accounts and only 4% invest any portion of their balance, suggests an analysis of more than 400,000 records from one of the nation’s largest HSA administrators.

As a result, HelloWallet cautions that inflation is eroding their healthcare purchasing power, which can be dangerous in the face of large medical bills. There’s also a sorely missed opportunity to accrue tax-free capital gains, which exacerbates a woefully low national savings rate and looming retirement savings crisis.

Indeed, such little investment activity involving HSA balances “illustrates the need for a holistic approach to personal finance guidance,” observes Jake Spiegel, a senior research analyst at HelloWallet, a personal finance software provider acquired by Morningstar in 2014. “It’s not always easy for workers to save enough for retirement or healthcare, but these tasks become more manageable when the worker has a budget plan and a debt pay-down strategy.”

The apparent under-use of HSAs is unfortunate, since financial advisers recommend employees fund an HSA before an IRA because of superior tax advantages, notes Beverly Gossage, an HSA pioneer and director of HSA Benefits Consulting, who says HelloWallet’s findings are in line with what she’s seeing in the marketplace. One culprit she cites is a lack of understanding between key differences in pretax, tax deductible and after-tax dollars.

HelloWallet found that invested HSA balances will grow more than 100% larger in real terms than those in non-interest-bearing accounts, assuming 2% annual inflation and 4% annual returns over 20 years. But there are systemic problems that can turn this objective into an uphill battle.

Many HSA administrators, for example, require that a minimum threshold be met before account balances can be invested. “This additional bit of friction all but ensures that account holders who are not particularly engaged with their finances will not open a brokerage account within their HSAs and that only the most engaged and financially savvy account holders will elect to invest some portion of their balances,” according to Spiegel.

Data-driven approach

He says benefit brokers and advisers can offer meaningful insight into what works and what doesn’t work through a data-driven approach that analyzes workforce demographics. The hope is that better education will at least help boost account contributions. 

“Are HSAs more widely adopted when they are rolled out alongside promotional materials?” Spiegel asks. “Do workers save more to an HSA when they have access to a tool where they can visualize their healthcare spending needs, or does this effect vary by the employee’s age? Questions like these can help employers tailor plans and rollout strategies to their workforce, nudge employees to make better use of their HSAs, and establish and inform best practices.”

The temptation to spend funds that could otherwise be invested in an HSA on more pressing needs eases with sufficient emergency savings, Spiegel explains. The thinking behind high deductible health plans is they feature monthly premiums that are low enough to help workers save more money in their HSAs, he says. However, Gossage says premiums have spiked so much under the Affordable Care Act, even for HSA qualified plans, that there’s simply less money to fund HSAs.

Noting how widespread adoption of HSAs only took hold recently — 13 years after their inception – Spiegel believes there’s still cause for optimism. “Perhaps as these accounts become a fixture in workers’ benefits packages, much like 401(k)s, adoption and use will improve over time,” he concluded when announcing HelloWallet’s findings.

Shutan is a Los Angeles-based freelance writer.

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