Health savings accounts have been around for more than a dozen years, but until recently they haven’t gotten the attention from financial advisors that many say they deserve.
Despite their name, health savings accounts can be as much a retirement savings vehicle as a health care financing plan. That’s because deposits into these plans are pre-tax, grow tax-free and, if used for health care costs, are withdrawn tax-free.
“HSAs are a great planning tool,” says Carolyn McClanahan, director of financial planning at Life Planning Partners, a Jacksonville, Florida, financial advisory firm, and a former emergency room physician. “They provide a triple [tax] whammy … and if you don’t use the money for medical, you can save it for retirement so you get tax-deferred accumulation, just like an IRA.”
Withdrawals from HSAs for nonmedical purposes are taxed at one’s income rate if the account owner is at least 65 years old; younger investors face an additional 20% penalty.
McClanahan says “most comprehensive planners” she knows discuss HSAs with clients and those who don’t “need to start.”
Why Advisors Should Offer HSA Advice
There are many reasons why advisors should include HSAs as part of their product mix for clients besides the savings and tax benefits they provide, among them the new Department of Labor fiduciary rule requiring advisors to put their clients’ interests first and the growing competition from robo-advisors that has commoditized investment advice. These developments will make it harder for advisors to keep clients if they focus primarily on investments, says McClanahan.
“Under the DOL regs, how can you ignore hundreds or thousands of dollars in savings and taxes?” says Ron Mastrogiovanni, co-founder and CEO of HealthView Services, a health care consulting firm. “You can’t ignore it. HSAs will become more important, and 401(k) recordkeepers like Fidelity and Schwab are seeing this.”
Indeed, growth of the HSA market is accelerating along with rising health care costs. (Employers usually save money on health care benefits using HSAs and their associated high-deductible insurance plans in addition to or instead of other health care plans.)
HSA assets as of June 30, 2016, were 22% higher than a year ago, at almost $35 billion, while the number of accounts jumped 25% to 18.2 million, according to Devenir, an investment advisor and consulting firm. It projects that by the end of 2018, HSA accounts will reach 27 million with assets topping $50 billion.
Why Aren’t Advisors Pushing HSAs?
So why isn’t every fee-based advisor who charges clients for an overall financial plan advising clients on HSAs, especially given the rising costs of health care in retirement? Fidelity recently reported that health care costs, excluding long-term care, for a 65-year-old couple living into their mid (husband) to late (wife) 80s will cost an estimated $260,000 during their lifetime, up 6% from last year.
(Related on ThinkAdvisor: Health Care Expenses for Retired Couples Hit Record $260,000: Fidelity)
One reason is that HSAs have traditionally been considered a health benefit only, offered by employers or sold by brokers to individuals. They must be partnered with a high-deductible health plan, so consumers often focus on comparing the high-deductible plan and its fees to an alternative health care plan such as an HMO, PPO (preferred provider) or POS (point of service) plan and its fees, neglecting the investment benefit of the HSA.
Many HSA holders don’t take advantage of the investment component. The latest report from the Employee Benefit Research Institute (EBRI) on investment options and HSAs found that only 6.4% of HSA owners used the investment option in 2014.
“A lot of people who have these accounts don’t know they can invest with them,” says Paul Fronstin, EBRI’s director of health research.
A financial advisor can help with that, not only at the individual client level but also at the corporate level, working with employers to set up and administer HSA plans like they do with 401(k) plans.
“We believe HSAs are an important component of reaching retirement goals … and we also believe that a 401(k) advisor is in a better position than a benefits broker to administer that [HSA] plan,” says Babu Sivadasan, group president of Envestnet | Retirement Solutions.
Envestnet is making a big push into the HSA market over the next six months and expects to offer an integrated HSA solution for advisors by the end of the year, in partnership with HealthSavings Administrators, which manages nearly $500 million in HSA assets in 50 states.
“Advisors are always looking for ways to grow their practice," Sivadasan says. "HSAs are another golden opportunity.”
And it’s beginning to be recognized. “The interest in HSAs is growing," Fronstin at EBRI notes. "Financial advisors are catching on to this.”
What Advisors Need to Know about HSAs
These are the basics for 2016:
Tax benefits: Contributions are pretax and investments grow tax-free, like 401(k) contributions and assets, but withdrawals are also tax-free, like Roth IRA withdrawals, if they’re used to fund medical services and products. In addition, HSA contributions are exempt from the FICA payroll tax, which is not the case for 401(k) or Roth plan contributions.
Anyone can participate so long as they have a high-deductible health care plan linked to an HSA, don't have a general flexible spending account and are not collecting Medicare, but there are limits to that participation. In 2016, contributions are capped at $3,350 for individuals and $6,750 for families, but those 55 or older can contribute an additional $1,000. (Medicare participants, however, can use HSA funds to pay medical bills.)
Although the maximum contributions may not seem like much, they can be substantial over a period of 10 years, adding to the retirement assets that advisors manage.
McClanahan says she keeps her clients’ HSA assets in a savings account until they top $20,000, then helps to invest those funds.
HSA assets will grow fastest if the client doesn’t withdraw them for medical purposes before retirement but allows them to grow, using other funds to finance their medical bills, which will be subject to high-deductible insurace plans. “Financial advisor clients are more likely to be in that position,” notes Fronstin.
Clients who pay their medical bills with other money should save all their medical bill receipts to reimburse themselves from their HSAs later on.
“A lot of education needs to go on about HSAs” and not just on the financial side, says Fronstin. “We found in our research that high deductibles become a barrier to health care [with] people cutting back on the use of services in ways that are good and bad. People with chronic conditions are less likely to get medication when they have to pay retail rather than a co-pay.”
They may also avoid procedures such as cancer screenings not realizing that all health care plans now, because of the Affordable Care Act, are required to provide that coverage for free, says Fronstin. “Advisors need to know these details … and make sure their clients understand these products.”
--- Related on ThinkAdvisor:
- Health Care Expenses for Retired Couples Hit Record $260,000: Fidelity
- HSAs, Medicare and Social Security: Avoiding Tax Penalties
- DOL Fiduciary Rule Highlights HSA Retirement Income Value