Employers are taking the reins when it comes to HSAs

PSCA study reveals increase in popularity but advisor says accounts are a 'real struggle' to understand.

With health care costs skyrocketing over the past several years, it’s no surprise employers and employees are turning their attention to health savings accounts.

A recent study from the Plan Sponsor Council of America shows that HSAs are continuing to gain in popularity and explores trends in how these accounts are positioned by employers as well as how they’re used by employees.

According to the study, nearly 60% of workers are enrolled in a health option that qualifies for an HSA; 88% of eligible employees had an HSA in 2022; and 80% were contributing to their HSA, up from 72.8% in 2021.

Andrew Herzog, certified financial planner at The Watchman Group in Plano, Texas, said when he had a high-deductible health plan, he contributed to a family HSA.

“In fact, I maxed it out,” Herzog said. “The triple tax-advantaged nature is irresistible: immediate tax deduction, tax-free growth each year, and tax-free withdrawals if used for qualified medical expenses. I treated it as another retirement account.”

The average participant contribution last year was $2,323, which was down from the last couple of years, the study found. However, the average HSA balance was $6,130 up from $4,237 in 2020.

“HSAs are a real struggle to understand,” said Jan Valecka, principal at Valecka Wealth Management. “At first, [clients] think it’s the same as a flex plan, where you lose the money if not used by the end of the year. Employers need to do a better job of explaining the difference between HSA and FSA.”

Three-quarters of employers contribute to employees’ HSA. Of those that do, more than half provide a set amount based on the coverage level while less than 10% match employees’ contributions to the accounts.

“Employers can play an important role in providing access to these types of tax-advantaged savings vehicles, and helping their employees understand the full range of options they have to save and invest for the future using HSAs,” Karen Volo, head of health and benefit accounts at Fidelity Investments, said in an email.

The ability of employees to fund their HSAs seems to be a growing concern among employers, the study found, and cited by nearly a third of respondents.

Herzog said that many employees are hesitant to contribute to an HSA because it’s less familiar than other investment accounts and restricted in its use.

“Much like a 529 account, withdrawals must be for qualified expenses to avoid penalties and taxes and some people don’t like to be boxed in,” he said. “Many Americans have no free cash flow to fund an emergency fund, let alone an investment account, so that prevents them from taking advantage of an HSA.”

The study also found the portion of organizations that automatically enroll eligible employees in an HSA is increasingly growing, with 46.7% of employers enrolling workers automatically in 2022, up from 41.5% in 2021.

Valecka added that while it’s good that companies are automatically enrolling workers in HSAs, the employee still needs to sign off because it’s a deduction from their paycheck.

“There needs to be more education to the employee,” she said. “There are very few people that want to sit down and study it. They have to sit down and just look at the package.”

Ann Brisk, senior director of innovation and strategy at HSA Bank, said the research sheds new light on educating both employers and employees.

“This new research highlights the opportunity to educate employees about the benefits of HSAs as an investment account and change the perception of how these accounts can be used to empower consumers to think holistically about long-term financial planning, especially during open enrollment season,” Brisk said in the release.

[More: HSA fees fall, but their use as investment vehicles remains limited]