Magazine

UpFront | Published in February 2017

Are HSAs Set to Follow The Growth Of 401(k)s?

By Rebecca Moore | February 2017
Art by Jenn Liv
Health savings accounts (HSAs) got their start with the passage of the Medicare Modernization Act in 2003, says John Park, chief strategy officer at full-service consumer-driven health plan provider Alegeus, in Waltham, Massachusetts.
 
HSAs must be paired with a high-deductible health plan (HDHP). “The idea was to drive some financial responsibility for individuals and to allow consumers to have a savings account to offset out-of-pocket costs,” Park notes. He adds that HSAs have benefits unique to any other kind of tax-deferred accounts. They offer triple tax benefits: Contributions reduce taxable income; earnings on the accounts build up tax-free; and distributions from the accounts, for qualified expenses, are not subject to taxation.
 
Park attributes the rise in adoption of HDHPs with HSAs to the employers’ cost of health care. Employers can lower or maintain premiums by creating higher deductibles and increase premium cost sharing to employees. It promotes more financial responsibility but also creates the need to help consumers make better decisions.
 
Park says there are many parallels in the adoption of HSAs and 401(k)s. Since their introduction in 2003, HSAs hold more than 20% of market share. Similarly, it took some time for 401(k) plans to be adopted—although introduced as part of the Employee Retirement Income Security Act of 1974 (ERISA), they took more than 10 years to gain the same percentage of market share that HSAs have now.
 
In addition, 401(k)s were met with reluctance at first. Similarly, the retirement industry first saw HSAs as competition for savings dollars, according to Park, but as health care became a bigger part of the conversation about retirement expenses, HSAs have gained acceptance as a complementary savings vehicle.
 
Lanzoni says Guardian’s “A Crack in the Foundation” study found that even though the number of employers offering an HDHP seems to be on the rise, three out of five fail to offer an HSA alongside it. Employers should realize the unintended consequences of moving to an HDHP without all the pieces in place, he says. If employees cannot afford unexpected medical bills, they may put them on credit cards, tap into retirement savings or college education funds, or even forego care.
 
Communicating the tax benefits of HSAs could inspire employees to adopt them, Lanzoni suggests. He advises tailoring the education to different generations and focusing strongly on the real benefits the accounts offer.
 
As employers moved to 401(k) plans, they did not walk away from investing in employees’ retirement, Park notes. Just as employers provide matching contributions to employee 401(k) deferrals, they could seed and help fund HSAs. “Employees are less likely to adopt HSAs and contribute if the employer doesn’t—the same as with 401(k)s,” he says.
 
Park says Alegeus has seen a trend in employers tying contributing to HSAs with employees taking actions such as participating in wellness programs.
 
He believes that, in the next few years, about 20% of health savings account assets will be in investment vehicles—Alegeus is seeing employers try to match investment options in HSAs to those in their 401(k)s. “It’s nice for employees to have a single view and manage investments in the same way,” he says.
 
One other similarity of HSAs to 401(k)s in their early years is the potential for growth. Park believes adoption will increase 20% to 30% per year.
 
Lanzoni also sees much opportunity for growth, especially among small employers.

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