Are HSAs the Key to Making Obamacare Work?

Employees contribute far below the maximum amount allowed to an individual-coverage or family-coverage health savings account (HSA), a sign consumers aren’t taking full advantage of the account’s tax benefits, according to a new analysis of consumer records.

Managing health costs, particularly for consumers in or approaching retirement, is considered a growth area for insurance agents and advisors doing comprehensive financial planning. HSAs are primed to play a key role.

More than 20 million Americans have access to health plans with HSAs, according to the trade association America's Health Insurance Plans (AHIP). Congress recently passed bipartisan legislation expanding the use and contribution limits for HSAs.

The key is to get more Americans to utilize their HSAs, analysts say, which can offer relief for skyrocketing health insurance costs.

The 2015 HSA contribution limits set by the U.S. Treasury are $3,350 for individuals insuring only themselves through a high-deductible health plan and $6,650 for family coverage through a similar plan.

The average contribution for an individual-coverage HSA across the manufacturing, health care and education sectors was $1,398 from the employee and $551 from the employer, or $1,949. That is well short of the 2016 limit of $3,350, according to the analysis conducted by Benefitfocus, a cloud-based benefits management company.

Results are published in company’s State of Employee Benefits, Industry Edition 2016, which pulled data from 400,000 anonymous consumer records at employers with more than 1,000 employees last year.

Massive high-deductible health plan adoption coupled with low HSA contributions means the message of self-financed contributions isn’t resonating as loudly as it should, said Jeff Oldham, vice president of customer success at Benefitfocus.

Average contributions for a family-coverage HSA across the manufacturing, health care and education sectors was $2,768 from the employee and $1,161 from the employer, or $3,929, still short of the 2016 limit of $6,650.

As employers shift more of the cost of health care onto employees, HSA plans gave gained traction in the market.

At the end of last year, there were 16.7 million HSA accounts holding almost $30.2 billion in assets, according to Devenir Research’s 2015 year-end HSA Market Survey. HSA assets are expected to top $37 billion by the end of this year, the researchers said.

Maximum Limits and Underfunding

Employees in the education sector tend to self-fund their HSA to a greater degree than employees in the manufacturing and health care sectors, the Benefitfocus data show. Manufacturing workers lead adoption of high-deductible health plans.

“If manufacturing companies had any doubt about their efforts to introduce HDHPs (high-deductible health plans, they needn’t; for the most part, their employees are on board,” the report said.

But just because an HSA accountholder doesn’t save up to the limit allowed by the government doesn’t mean the account is “underfunded.”

A 25-year-old with one or two minor health claims over a 12-month period doesn’t need to put aside $3,350 annually, unless he or she wants to take full advantage of the tax benefits or invest the HSA contribution.

Health plans with the lowest premiums typically come with the highest deductibles, which sometimes run as high as $12,000 or more. Setting aside that much would take an employee three or four years to achieve.

If there’s not enough in the HSA to fund a catastrophic injury, accountholders often need to borrow from family, friends or credit card lenders to pay the balance.

Baby boomers tend to favor more traditional HMO and PPO plans while millennials, many of them weighed down by debt, gravitate to high-deductible health plans, Oldham said. The latter plans are cheap and young professionals starting out can’t afford anything else.

“You have to get folks out of debt and manage debt appropriately, otherwise the HSA contribution is last on the list,” he said.

Health care financing experts have called HSAs the 401(k) of the health care system because consumers fund their own health expenses similar to funding their own retirement through a defined contribution plan.

The accounts are portable and can be used to pay for health care expenses from one employer to the next, so long as the employer offers a high-deductible health plan.

Advantages of HSAs and high-deductible health plans include lower premiums, income tax reduction, tax deferral on assets in HSAs, rollover provisions, tax-free distributions, policyholder control and asset protection.

Disadvantages of HSAs mean the potential for higher out-of-pocket costs, penalties for nonqualified expenses and are not suitable for employees suffering from chronic conditions.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]