A panel of experts assembled for the first session of the 2022 PLANSPONSOR-PLANADVISER HSA Conference discussed the most important health savings account features and the complex taxation and spending rules governing their use.

Beyond covering such topics as eligibility requirements, tax treatment rules and allowable expenses, the speakers also discussed recent regulations and legislation related to HSAs. The speakers included Greg Adams, a consultant with Fiducient Advisors, Samuel Baldwin, an attorney with Verrill, and Inci Kaya, a health care analyst with Aite Group.

Recounted below are some highlights from the discussion, which was designed to help benefits professionals and their advisers get up to speed on a fast-growing benefit option and provide timely information and education that can be used to help with HSA design decisions.

Baldwin on What Makes HSAs Unique

“There are a few characteristics that make an HSA an HSA,” Baldwin said. “First and foremost, it needs to be paired with a high-deductible health plan. So, in order to qualify to make HSA contributions, the person needs to be enrolled in a high-deductible health plan and not enrolled in any other coverage that doesn’t meet the high-deductible health plan requirements.

“The big characteristic of an HSA is the tax savings. HSAs enjoy what we call a ‘triple tax savings.’ First, there are tax savings on the contribution. If you qualify to make contributions to an HSA, your contributions are tax-free going in. Second, the money grows tax-free if it’s left in there over time. And finally, when you take the money out of the HSA, if it is used for qualifying medical expenses, those distributions from the HSA are also tax-free.

“Given this framework, the HSA can be a really powerful savings tool. For some people in some circumstances, it can be a really good long-term savings vehicle.

“Unlike a lot of other employee benefits, the HSA is not subject to ERISA, if designed appropriately. Specifically, the HSA is an account that the individual owns, and the employer is just facilitating the access to the HSA. Of course, it is also important to remember that certain approaches or design decisions can create obligations for the employer under ERISA. One of the ways you can accidentally make your HSA subject to ERISA is by telling employees it’s an employer plan.”

Adams on Why Employers Would Want to Offer an HSA

“There are no other types of savings or investment accounts that you can get that triple tax benefit from,” Adams said. “From an employee standpoint, that’s an incredibly powerful tool. From an employer standpoint, in addition to creating health care consumerism, there can be pretty significant savings on the payroll taxes.

“In the event that you are able to allow employees to contribute to an HSA through payroll, the employer is not going to be responsible for the Social Security tax associated with the employee contributions. There can be massive savings to the employer’s bottom line. It can be a powerful tool for the employer to really help improve their profitability.”

Kaya on Post-Pandemic HSA Trends

“Looking at what HSA account owners were spending annually on health care goods and services prior to the pandemic, this figure was in the high $1,600s or maybe the low $1,700s. They were spending this on anything from sunblock to medical devices to doctors’ visits,” Kaya said.

“While people sat at home and postponed or cancelled non-essential medical procedures, it was only natural that the spending in those accounts declined by several hundred dollars. For employers, there were layoffs and there were furloughs, and so, there was a lot of communication and education efforts that shifted to COBRA benefits and the effort to remain compliant on that front.

“More recently, the picture has changed. Now, people are active again and they are out there switching jobs. And so, maybe they are leaving one employer and taking that account with them. Perhaps they are opening a second HSA. These situations require education and communication by employers.

“Approaching the post-COVID phase, we expect, gradually, that the contributions into these accounts and the spending coming out will recover to where they were before. We expect to see something in the vicinity of $2,000 or so on average going into these accounts per year. We are going to see people with multiple HSAs, not unlike how many of us have multiple 401(k)s or retirement plans.”

Adams on Whether Employees Should Invest HSAs

“Employees should 100% be allowed to invest their HSA funds,” said Adams, “because as we have talked about before, there are a lot of components of HSAs that make them incredibly powerful for long-term financial wellness. Being able to invest those dollars to get tax-free returns, and then to use the proceeds for current or future qualified medical expenses, is incredibly powerful. Being able to invest the money in higher-return instruments such as stocks and bonds, as opposed to just a money market or savings account, is going to make a huge difference for individuals over the long term.

“I think one of the biggest trends that I am seeing as far as investing in HSAs goes is a bigger emphasis on education for the individual. It is all following the same trajectory that we saw with qualified retirement plans, where participants did not at first necessarily have a full understanding of how to utilize their 401(k) or 403(b). In addition, we are seeing the development of financial wellness software that is including HSAs and providing next-best-dollar calculations—determining where to spend money on benefits and how to optimally allocate savings and investments.

“When looking at investment elections, you want to be cognizant of whether you are a spender, or somebody that is putting money in and taking it out each year. Alternatively, you may be a saver, trying to build up a little bit of a buffer for more major medical expenses in your future. Finally, you may be an investor and really have a long-term perspective on having this money grow over time—having it be there for you potentially in retirement. Because of those three components, we are seeing slightly different investment elections inside HSAs relative to the traditional retirement plan.

“From an employer standpoint, when it comes to investments, selecting an HSA provider will not make your plan subject to ERISA. But, if you start getting into exercising discretion over the investment menu, this is where things get a little bit dicey. Choosing a provider is okay. Having an outside third party select the investments is okay. On the other hand, employers want to stay away from any situation where they are actually selecting investments or exercising discretion over the investments.”