HSAs: 19 and still going strong

A belated happy birthday to health savings accounts, which turned 19 in December 2022. Officially established in 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act to help individuals save on their overall health care costs, HSAs allowed people to set aside pre-tax money to pay for qualified medical expenses. As we look forward to HSAs 20^th birthday, it’s important to look at how these accounts came to be, where they stand now and what they could look like in the future.

The early days of HSAs

The concept on which HSAs were built can be traced to the 1990s and an amendment to HIPAA that established Archer Medical Savings Accounts. Archer MSAs allowed certain individuals to set aside tax-free money, specifically for medical expenses, and then spend those savings tax free. Funding for the accounts was contributed by either the individual or the employer, but not both. The number of accounts that could be opened was limited to 750,000. The accounts were also limited to the self-employed or employer groups with 50 or fewer employees, and participants had to be enrolled in a high-deductible health insurance plan.

On Dec. 8, 2003, President George W. Bush signed the MMA, which removed HIPAA’s limit on the number of accounts granted and the employer size restriction, allowing anyone covered by a qualified HDHP to become eligible to enroll in an HSA. The MMA set annual minimums on qualified health plan coverage deductibles, maximum contributions by coverage type among other requirements.

Where we see HSAs today

Today, HSAs are a consumer-owned funding vehicle that allows Americans to contribute pre-tax income for saving, investing or spending on eligible out-of-pocket medical expenses not covered by insurance. This could include doctor visits, diagnostic tests, lab fees, vision, dental and prescription drug expenses as well as over-the-counter items. HSAs combat rising health care costs for consumers via a triple tax advantage, including tax-deductible contributions, tax-free growth of funds and tax-free withdrawal of funds, provided the funds are used on qualified out-of-pocket medical expenses. These tax advantages save American consumers up to 30% on their out-of-pocket medical costs. The accounts are individually owned, funds in the account roll over from year to year, and the accounts are portable – the employee maintains ownership even after separation from service.

HSAs have evolved since their inception from what many considered a tax shelter for the rich to a long-term savings and retirement strategy for the average American. According to Devenir, 78% of all HSA account holders have an annual household income of less than $100,000. According to that same study, 34 million HSA accounts were established by mid-2022.

With the high number of accounts and the workforce now being dominated by millennials and Generation Z, employers have begun to introduce a more modern HSA experience. As digital natives, many within the younger workforce have higher expectations for employment, benefits, retirement planning and well-being compared to their predecessors who are working to catch up on retirement savings and struggling with how they will pay for health expenses in retirement. Modern HSAs support each generation of workers by providing simple, easy access to their account, modern investment experiences and access to an HSA debit card. They also have data-driven tools to guide spending and saving, information on investment opportunities and general account management and customer service.

The future of HSAs

It's important to also look at the future of HSAs and how they can become accessible to everyone – not just those with HDHPs. In fact, a recent Kaiser Family Foundation survey found that the average single coverage deductible was well above the required minimum deductible amount for an HDHP. With healthcare costs continuing to rise, we expect to see continued HSA adoption as the “average” health plan begins to align with an HDHP.

Over time, we should see an increase in employer contributions, as employees begin to see HSAs as not only a spending account, but a part of their overall retirement strategy. Industry professionals have been pointing to opportunities for HSAs to be decoupled from HDHPs to allow everyone access—HSAs for all— as they’re a mechanism for all Americans to pay for out-of-pocket health expenses now while saving enough for retirement in a tax-advantaged way. This idea has been introduced within Congress in various forms, including several in 2023.

While the HSA roots were in the MSA experiment by Congress to encourage healthcare consumerism, they’ve transformed dramatically in the last 20 years. Today, they are being used in a variety of ways to cover healthcare expenses, and saving and investing to cover healthcare costs through retirement.  Looking ahead, we hope to see HSAs and their breadth of benefits become available to all.

Sandy Gleason is vice president of industry consulting at Alegeus. She may be contacted at [email protected].

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