If you are familiar with health savings accounts, or HSAs, you probably know that many HSA providers impose minimum cash balances on their account holders. These minimum cash balances mean account holders must maintain a set amount in cash, typically $1,000 or $2,000, before they can invest additional funds.
You may also have heard minimum cash balances described as a way to make sure account holders have sufficient funds on hand in case they are required to pay out of pocket for a large medical expense. However, rather than benefiting account holders, minimum cash balances act as a hidden cost by needlessly holding funds captive and throttling account holders’ ability to grow their savings. Benefits professionals promoting HSAs need to be aware of how minimum cash balances can burden account holders and how they can help relieve that pressure.
The Problem: Minimum Cash Balances’ Hidden Cost
If an account holder’s HSA provider requires a $2,000 minimum cash balance, that account holder must keep at least $2,000 in cash before they can invest any additional funds. In addition, most HSA providers’ interest rates on $2,000 are low, which means our account holder might only earn $5 in interest that year.
However, if that account holder had been free to invest that $2,000, with a 6% annual return they would have had $120 in returns at the end of the year. Our account holder is missing out on $120 of potential investment returns because they are not able to invest their HSA funds as they choose. This loss of potential investment returns is known as an opportunity cost.
But what about maintaining a cash account balance to pay for a sudden medical emergency? It turns out there are not many occasions where medical providers will require people to immediately pay $1,000 or $2,000 at the time of care. This means that if HSA account holders end up needing unforeseen medical care, they should have plenty of time to move assets from investments to cash to pay for those services.