More than ever, people are embracing the dual benefits of a health savings account as proactive way to finance healthcare and as a way to build wealth. In fact, one in five millennials is now enrolled in a health savings account (HSA), according to a new HSA market survey. And HSA holders over age 50 held more than $44 billion in their accounts at the end of 2020, with an average balance of $4,321, the survey found.
HSAs, which were established by Congress in 2003, are a relatively new option. So millennials are the first generation to take full advantage of HSAs so early in life. And for those in their 30s and younger, HSAs are more than just a mechanism to set money aside to cover healthcare costs, said Katie Patterson, employee benefits vice president at BOK Financial Insurance, Inc.
"A health savings account is both a medical rainy day fund and a wealth-building tool," Patterson said. "It also encourages people to be better healthcare consumers and puts consumerism back in the hands of the patient. Having a health savings plan can give people the opportunity to pause and make informed decisions that are right for them."
She explains the shift takes place when a medical need arises and people are spending the money they've saved in their HSA instead of the insurance company's money. They are likely to do more research for elective services to be sure they are getting quality care for an affordable price.
"In addition, an HSA is a wealth building tool for everyone, but especially millennials who have the benefit of time and compounding," said Patterson. "It's a chance to grow funds in a tax-free account, possibly take advantage of an employer contribution, and have another pool of funds to invest."
HSAs have grown in recent years, in part, because more employers are offering high-deductible health insurance plans with an HSA option.
In fact, a recent Employer Health Benefits Survey found that 31% of employees were enrolled in a high-deductible health plan and health savings account in 2020, up from 24% just five years earlier.
For the most part, HSA holders use the funds for expected medical expenses and routine visits.
With expected medical, dental and vision expenses combined, more than 71% of all HSA expenses were used for annual expenses last year. That number jumps to 84% when adding prescription drug spending, according to the 2020 HSA Spend Report.
People often expect to have more medical expenses later in life, so an HSA is a vehicle to save for that. Others invest in an HSA with the goal of leaving their money alone and treating it like a savings account where funds can grow tax-free.
These funds can also be invested. Patterson said some HSA providers offer more options for investing than others but that your company's benefits enrollment information should provide details.
"If you don't spend it, you save it and those funds accumulate over time," she said. "In that way, it's a great savings mechanism."
According to a survey by Devenir, HSA asset growth remained strong, increasing to $73.5 billion in assets held in over 29 million accounts, a year-over-year increase of 19% in assets and 12% in the number of health savings accounts for the period that ended June 30, 2020.
Patterson explained that an HSA offers three key tax advantages:
- Contributions into an HSA are pre-tax.
- Interest and investment earnings are tax free and can remain in the account for the long-term (in contrast to a flexible spending account that requires you spend it by each year-end).
- Funds spent on qualified medical expenses are taken out of the savings account tax free.
"For millennials in particular, this could be especially appealing," Patterson said. "In this younger demographic, we statistically see less chronic illness, so the opportunity to save using this tool is a little higher. With the tax-advantaged saving opportunities, it's a win-win-win."
For anyone considering an HSA, she suggests:
- Do your research. Talk to your human resources team and ask about the employer contribution. More and more employers are offering high deductible health plans and the opportunity to earn company HSA contributions as part of their benefits package. There are also a variety of online educational resources available to understand how to best take advantage of this tool.
- Determine your comfort level. Is a high-deductible health plan right for you? Do a self-analysis of your finances to determine what you feel good about contributing each month or each year. Employees may want to look at the premium difference between the high deductible health plan and a traditional co-pay plan and consider taking that difference to invest in the HSA.
- Max it out. If you're able, contribute the maximum annually to take full advantage of an HSA. The maximum contribution limit can change, but in 2021, an individual with self-only coverage can contribute up to $3,600 per year (employer and employee contributions combined). If your employer contributes to the account as well, that's even more incentive to take advantage of the opportunity.
"Millennials are seeing the full advantages of a health savings account as part of their long-term financial planning," said Patterson. "They're recognizing it for what it is—a useful tool in your overall health and wealth strategy."
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