By Cyril Tuohy
A worker who contributes the maximum allowable amounts for 40 years without any withdrawals into a health savings account (HSA) could accumulate as much as $360,000 at a rate of return of 2.5 percent, a new analysis has found.
At a rate of return of 5 percent, the account would grow to $600,000 over 40 years, and at a rate of return of 7.5 percent, the account balance could reach nearly $1.1 million over the same period, the analysis by the Employee Benefit Research Institute (EBRI) has also found.
“Depending on the rate of return in an HSA, these accounts have the potential to generate significant assets,” said Paul Fronstin, director of EBRI’s Health Research and Education program and author of the new report analyzing HSAs.
It’s highly unlikely that salaried workers would accumulate as much as $1 million or even $600,000 since the projections are based on not making any withdrawals, which is the reason the accounts were created in the first place.
Still, some account balances have grown to $100,000 or more, according to HSA consultants, and the accounts could one day represent a significant source of assets to be managed with the help of a financial advisor.
HSAs were created by Congress in 2003 and offer generous tax advantages: contributions to the HSA reduce taxable income, earnings on the assets build up tax free and distributions for expenses that qualify are tax free.
Offered to employees who select high-deductible health plans, HSAs follow the defined contribution model in which employers and employees contribute a fixed amount into the account managed by a bank or an HSA administrator.
HSAs were popular with small employers at first but in the past five years, larger employers like Boeing and Marathon Oil have begun offering HSAs as a way to fund high-deductible health plans. The Internal Revenue Service has capped the 2014 employer and employee contribution for family coverage at $6,550 and at $3,300 for individuals with self-only coverage.
In March 2005, a year after HSAs were introduced as a Medicare carry forward balance replacing Medical Savings Accounts, HSAs enrolled 1 million lives, according to data from America’s Health Insurance Plans (AHIP).
The number of covered lives has swelled to 15.5 million as of January 2013, according to AHIP. By the end of 2015, account growth will reach 19 million, according to Devenir Research in Minneapolis.
HSAs contain similarities with the 401(k) retirement plans with which millions of employees are already familiar. HSAs are portable from one job to another, and HSAs offer dozens of investment choices, typically mutual funds.
Assets in HSAs have grown quickly, partly because of the strong performance of the stock market.
In 2006, total HSA assets were $1.7 billion. By 2015, assets are expected to balloon to $29.7 billion, according to the Year-End 2013 HSA Devenir Research Report.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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