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Helping clients master HSAs
Michelle Huffman, 05/20/2019
Health savings accounts are rising in popularity but remain misunderstood.
More Americans than ever are using health savings accounts (HSAs). Over the course of one year (July 1, 2017 – June 30, 2018), the total number of HSA accounts rose by 11 percent to 23.4 million.1 Experts predict that by 2020, that number will jump to 29 million. HSA assets are expected to increase from $51.4 billion in June 2018 to $75 billion over the same time frame.1
But increased usage doesn't necessarily mean greater understanding, particularly when it comes to the nuances that can make HSAs valuable investment vehicles. These rules are often what can trip your clients up, says Shobin Uralil, co-founder and COO of Lively, Inc., an upstart HSA provider that offers low-cost plans for individuals and employers.
For consumers, the biggest misconception is that HSAs operate like FSAs, or flexible spending accounts. But HSA funds don't fall under the “use it or lose it" rule that governs their FSA counterparts; they roll over indefinitely.
This opens the door for HSAs to become, essentially, “401(k)s for healthcare," Uralil says—tax-advantaged accounts that allow investors to accumulate assets for future use. But without broad consumer understanding, HSAs remain notably underutilized, creating a major opportunity for RIAs to help clients maximize their longer-term benefit.
If your client asks you about an HSA, the first step is to make sure he or she has access to one. Explain that HSAs are married to high-deductible health plans (HDHP), so an individual must be covered by one to qualify for an HSA. Nearly half of all Americans are enrolled in a health plan the government considers “high deductible"—a staggering 264 percent increase over the past 10 years. Because the minimum deductible thresholds and annual out-of-pocket maximums are high on these plans, enrollment is proportional to higher income levels. 2, 3
As you walk through how HSAs work, start with the tax benefits. Make sure clients know they can contribute, withdraw and grow money tax-free, provided funds are used for qualified medical expenses. It's also important to make sure they know they can use available funds at any time, to pay for a doctor's appointment today or a doctor's appointment 50 years from now.
For many people, switching to a high deductible plan with an HSA is about more than just potential tax benefits—it can shift how people think about the cost of their health care. Some experts believe the increased out-of-pocket expenses mean consumers are less likely to head to urgent care for minor issues, or to request lots of tests. But for those with chronic conditions or who consume a lot of health care, the plans don't always make financial sense.
Using accounts strategically
HSAs have one important advantage compared with 401(k)s: You can simultaneously deposit and withdraw money. This creates an opportunity for advisors to add value by guiding decision-making.
Because of the option to withdraw on an ongoing basis, for most consumers, there are three basic ways to use an HSA:
|•||As a medical checking account, where money is pulled out to pay for ongoing medical expenses|
|•||As a medical savings account, where money is used less frequently and left to grow|
|•||As an investment vehicle to eventually offset medical expenses in retirement|
“RIAs have a unique opportunity to work with their clients to determine how they are going to fund this account," Uralil says. “Are they going to hold a minimum cash amount in their non-investment account in case of any emergency and put some funding into an investment account? You can really do some life planning based on their demographics and family situation."
Depending on the plan offered by the HSA provider, many account holders can be agile with how they use their account over time. As their priorities and financial obligations shift, clients may require more guidance from you on potential investment options. Consider what kind of HSA user they are, and structure your discussions accordingly.
Starting the conversation
One way advisors can add value is by broaching the idea of HSAs with clients who don't have them yet—those who may never have considered one but could possibly benefit from the tax advantages and long-term planning opportunities they provide.
It may be worth talking to your clients—especially those who can pay for routine medical expenses out of pocket—about HSAs even if they currently have more traditional insurance coverage, like a PPO or HMO. The opportunity to save and invest in a tax-free, flexible vehicle is attractive to many, but your clients may not realize it's an option if they aren't currently in a high-deductible plan.
“When I was in my 20s, I never went to the doctor, but I always went with the insurance that provided me with the best coverage," Uralil says. “What I didn't realize at that time: I was paying for health insurance that didn't matter."
Uralil estimated that he could have amassed $100,000 to pay for out-of-pocket expenses after the birth of his son if he had spent the same amount on health care expenses but contributed to an HSA instead of paying high monthly premiums for his traditional plan.
And as the health care marketplace continues to evolve, more consumers will likely be covered by HDHPs; nine in 10 employers expect to offer them in 2019.3 For those covered by an HDHP, an HSA is practically essential. How they use it is up to them—and it's up to you to help guide them.
3 kinds of HSA users
Uralil has identified three profiles of HSA account holders: the investor, the saver and the spender. Because of an HSA's flexibility, all three of these individuals can benefit from an account but will use it in different ways. One way you can help your clients (who do not have their HSA option predetermined by their workplace) is by reviewing available plans, including fee and investment options, and figuring our which profile they match.
|•||The investor: “The investor is a little bit savvier, someone who sees the long-term growth potential and has the means to pay for things out of pocket," Urali says. The investor's perspective is bolstered by a unique element of the HSA: There's no expiration date for making claims or seeking reimbursement.
How to guide them: Help your clients consider their investment options, including the associated plan managers.
|•||The saver: “The saver may or may not have an investment account, but they are continuing to grow some cash in their balance in an interest-bearing account.
How to guide them: Review their savings strategy; are they able to withhold the maximum annual amount ($3,500 for individuals/$7,000 for families)?4 If not, consider what they can contribute and develop a plan to align their HSA account contributions with their other investment and savings vehicles.
|•||The spender: “Someone who doesn't have the means and relies on this account to pay for ongoing medical expenses."
How to guide them: These clients will be using their HSA more like a checking account, so they'll need to be cognizant of logistics, such as maintenance fees and online banking options.
1 “2018 Midyear Devenir HSA Research Report," Devenir Research, Aug. 22, 2018. (Found here: http://www.devenir.com/research/2018-midyear-devenir-hsa-research-report/)
2 “EBRI Finds High Deductible Health Plan Enrollees More Engaged With Their Health Care Than Traditional Health Plan Enrollees," Employee Benefit Research Institute, Dec. 20, 2018. (Found here: https://www.ebri.org/docs/default-source/ebri-press-release/pr-1229-cehcs-20dec18.pdf?sfvrsn=13ea3e2f_2)
3 “High-deductible Health Plan Enrollment Among Adults Aged 18–64 With Employment-based Insurance Coverage," Centers for Disease Control and Prevention, August 2018. (Found here: https://www.cdc.gov/nchs/products/databriefs/db317.htm)
4 “Health Savings Account Limits for 2019," Kiplinger, Aug. 28, 2018. (Found here: https://www.kiplinger.com/article/insurance/T027-C001-S003-health-savings-account-limits-for-2019.html)
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