Health savings accounts becoming the new IRAs

Tax advantages lead to investing and the need for financial advice

Jul 6, 2017 @ 2:01 pm

By Jeff Benjamin

With more than $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 advisers.

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 Devenir Group.

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 plans.

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 investment strategies.

"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 tax-management vehicles."

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 plans."

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