Over the past year, I have been reading article after article that gushes over the advantages of health savings account (HSA) investments. These articles are getting repackaged and reshared with growing frenzy. I worry that there is a serious dose of Kool Aid drinking going on. There is a major disconnect between the layperson’s reality and awareness of HSAs as a long-term investment vehicle and the industry’s bullishness. Growth projections are going to be giddily high when starting with a very small base, so that’s normal, but I am asking the Kool Aid drinkers to just temper expectations a bit because there is a concrete—albeit invisible—ceiling as to the number of accounts we can realistically expect to materialize.
In conversation after conversation with health benefit brokers, financial advisors, employers, colleagues with HSA plans, banks, HSA providers, and third-party administrators, I’ve noticed that only a handful of those with HSAs are aware or active on the investment front.
Here’s why. First, not every family has a high-deductible health plan (HDHP). We’ve estimated that to be about 25 million to 30 million families. Next, not every family that has an HDHP contributes to an HSA. Not every family is a double-earner household and not every double-earner family has the funds to max out their 401(k) plans—the mantra drilled into many Americans for a long time—and then also contribute to an HSA. So let's look at the math involved:
- US$18,000 per 401(k)—and there are two earners, so US$36,000
- US$7,000, the maximum HSA contribution per family
- US$10,000 or so that is withheld from paychecks to pay for health insurance premiums
- An estimated 30% to pay for federal and state taxes and other withholdings
That’s US$70,000 a year that our “unicorn” HSA investor would have to put aside before paying one single bill for the year, whether it be utilities, credit cards, groceries, rent, mortgage, or student loans.
The average income for the U.S. is US$63,000 or so. Let that sink in for a minute. We’ve just ruled out over half the population. That’s one example of what I mean by that invisible ceiling.
So an HSA investor is most likely going to be a US$250,000 earner household or above, to even say “HSA investments.” According to the U.S. Census Bureau, that is 5% of the population, about 15 million people, or 4 million to 5 million households. That shows another piece of the invisible ceiling.
So how do we grow the available market for HSA investments and push beyond any ceilings? Here are a few for starters:
- There is an industry-wide effort to broaden the available market size of HSA investors by pushing for better wages and better benefits. More income can help shift households from the paycheck-to-paycheck lifestyle toward a longer-term planning lifestyle.
- Enrolled members prioritize contributing to their HSAs over their 401(k) plans (which requires an inordinate amount of education and awareness).
- Maximum HSA contribution limits increase from US$7,000 to double that amount (which will spur years of debate on whether this is yet another tool for the rich to stash their funds tax-free).
I don’t doubt that there is growth ahead, because we are starting from such a small base, and assets will grow over time. But until some of the ceiling—the available market—opens for a broader segment of the population, I suggest you keep a dose of reality to temper the buzz.
In the meantime, I invite you to stay tuned for the results of our employer benefits survey that will reveal perceptions and usage around HSAs and primary research on the potential merge of HSA investments and 401(k) plans as we head into summer and drink a glass of Kool … um, glass of lemonade.