Many are not maximizing HSAs – A misunderstood savings opportunity
BOSTON, June 14, 2018 –Today, Fidelity Investments® announced it has continued to see double-digit growth of its health savings account (HSA) business, adding 112 new employers in 2017 that provide HSAs to their employees. Account openings are also on the rise, with Fidelity’s 837,800 individual account holders representing $3B in assets, a 50 percent increase from 20171.
Fidelity’s new “Building Healthy Futures” report, an analysis of how people are saving for health care, shows one-in-four (25 percent) employees with access to an HSA are now using one of these triple tax-advantaged savings accounts2. When employers only offer an HSA-eligible health plan, nearly half (46 percent) of employees are electing to add this savings benefit. However, Fidelity’s research also finds that despite growth in HSA openings, many individuals are not making the most of the benefits these accounts can offer, missing out on the opportunity to grow health care savings for the long term.
“With more than half of Americans naming rising health care costs as a top financial concern3, this increased adoption of HSAs shows an encouraging trend that more people are making health care savings a priority,” said Eric Dowley, senior vice president, HSA Product Management, Fidelity Health Care Group. “But we still see a need for more education around how people estimate and plan for potential health care costs – both in the short and long term – and how an HSA can be a valuable tool in addressing these expenses. Our goal is to bring more clarity to the planning process, and ensure individuals feel empowered to make confident financial choices regarding their health and total wellbeing.”
Breaking Down the Health Care Savings Account
While this rise in HSA adoption signals more people proactively saving for health care, the topic still generates a range of questions and misconceptions. Even among account owners, many still are not fully aware of how HSAs work.
An HSA is a tax-advantaged offering available to individuals covered by an HSA-eligible health plan, also known as a high deductible health plan (HDHP). An HSA enables them to save pre-tax dollars for both current and future qualified health care expenses, including costs associated for dental, vision or out-of-network doctor visits, prescriptions and over-the-counter drugs and even Medicare premiums once eligible.
HSA holders can use the account to pay for current expenses, and because the balance can carry over from year to year, it can also be a powerful tool to accumulate money and invest savings to pay for future expenses. In addition, these accounts are praised for their triple tax benefits4:
- contributions to an HSA are tax-free,
- balances can be invested and earnings grow tax-free, and
- savings can be withdrawn tax-free for qualified medical costs.
Maximizing Your HSA
While more individuals are saving in an HSA, a closer look at how these accounts are used shows that many may not be making the most of their benefits. Here are five ways to maximize the savings and growth opportunities of an HSA:
1. Increase contributions
Last year, individual and family account owners on average contributed less than half of what they could have ($1,800 and $3,800 respectively)5. By contributing to the limit, account holders save with pre-tax dollars, but also reduce their total taxable income. Contribution limits for 2018 are $3,450 for an individual; $6,900 for a family; and $1,000 in catch-up contributions for those over age 55.
2. Use it now AND later
Nearly 40 percent of people think if they don’t spend what they contribute to an HSA they’ll lose the money at the end of the year6. Not true. Often confused with a Flexible Spending Account (FSA), in which savings must be used by year end, an HSA balance will carry over from year to year, helping to build a nest egg for the future.
3. Invest for growth
Nearly half (46 percent) of HSA account owners don’t realize they can invest contributions in mutual funds or other investment products, depending on available options through their provider7. Today, a majority of savers keep their contributions in cash, with only 7.7 percent of account owners investing any portion of their savings8. Consider increasing contributions or paying for current expenses out of pocket to take advantage of longer term investment earnings.
4. Rest assured: use savings as needed when at age 65
Fifty-three percent of HSA owners didn’t know that as of age 65, HSA balances can be used for other expenses in retirement9. Users will pay regular income tax on withdrawals not used for health care needs, but there is no additional penalty.
5. Know that good savings habits can be contagious
According to Fidelity analysis across all income levels, those who save in both an HSA and defined contribution retirement savings account like a 401(k) or 403(b) tend to save a higher percentage of their paychecks (10.5 percent) than those who just save in a retirement account (7.7 percent). HSA savers also have an average of $119,000 more in retirement savings10.
More Resources to Understand and Plan for Health Care Expenses
Fidelity has developed a range of resources to help individual savers and employers learn more about planning and saving for health care, including these resources: 3 healthy habits for health care savings accounts; How to plan for rising health care costs; How to talk to your doctor – and save money; Your bridge to Medicare; Getting your HSA in shape.
For employers who are evaluating the power of an HSA for its workplace, Fidelity’s Building Healthy Futures report provides an analysis for HSA adoption and contributions, investing behaviors, generational insights, and more.
About Fidelity Investments
Fidelity’s mission is to inspire better futures and deliver better outcomes for the customers and businesses we serve. With assets under administration of $6.9 trillion, including managed assets of $2.5 trillion as of April 30, 2018, we focus on meeting the unique needs of a diverse set of customers: helping more than 27 million people invest their own life savings, 23,000 businesses manage employee benefit programs, as well as providing more than 12,500 financial advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for 70 years, Fidelity employs more than 40,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Fidelity Brokerage Services LLC, Member NYSE, SIPC
900 Salem Street, Smithfield, RI 02917
© 2018 FMR LLC. All rights reserved.
1 Fidelity Investments HSA business data as of January 31, 2018
2 With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.
3 Fidelity Investments Financial Resolutions Study, December 2017
2018 Fidelity Health Care Business Update / 4
4 With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.
5 Fidelity Investments, Building Healthy Futures, May 2018
6 Represents the findings of an online survey conducted among a demographically representative U.S. sample consisting of 5,133 adults, 18 years of age and older. Interviewing for this CARAVAN® Survey was completed Dec. 9 – 21, 2016, by ORC International, which is not affiliated with Fidelity Investments. Included in the analysis were 1,309 respondents enrolled in an HSA-eligible health care plan. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.
8 Fidelity Investments, Building Healthy Futures, May 2018
9 Represents the findings of an online survey conducted among a demographically representative U.S. sample consisting of 5,133 adults, 18 years of age and older. Interviewing for this CARAVAN® Survey was completed Dec. 9 – 21, 2016, by ORC International, which is not affiliated with Fidelity Investments. Included in the analysis were 1,309 respondents enrolled in an HSA-eligible health care plan. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.
10 Fidelity Investments, Building Healthy Futures, May 2018