Though the past 10 months have been an incredibly difficult period in the financial markets, health saving accounts are alive and well. In fact, HSA contributions and withdrawals picked up significantly in the first half despite a down market, according to a midyear study by Devenir Research.
"We'd seen pretty muted growth in both HSA contributions and withdrawals during the pandemic," said Jon Robb, Devenir's senior vice president of research and technology. "It started to pick up a little bit at the end of 2021. But we really saw it kind of bounce back in the first half of this year. It's a great sign seeing people engaging in these accounts."
A health savings account allows account holders to contribute pretax dollars to cover qualified medical expenses. Those include deductibles, co-payments, coinsurance and other expenses. You must have a high-deductible health plan (HDHP) to take advantage of an HSA account.
This special report, which includes the 13 Best HSA Accounts For 2023, marks IBD's sixth story package on HSA account rules and usage.
An HSA research leader, Devenir reported that HSA assets grew to $98.8 billion as of June 30, a 6% increase from the prior year. The number of accounts rose 9% to nearly 34 million. Account holders contributed over $26 billion and withdrew $18 billion in the first half of this year — an 11% and 12% increase from the prior year, respectively.
If these numbers sound encouraging, another piece of good news is that contribution limits are going up for 2023. Indeed, HSA investors and savers alike will be able to contribute $3,850 for an individual (up $200 from 2022), and $7,750 per family (up $400 from 2022), per IRS 2023 rules for HSAs.
HSA Contributions: A Hedge For High Medical Costs
Considering the skyrocketing cost of health care hitting U.S. households, anything that helps people save on medical costs is welcome news. And this is especially true for HSA accounts, which provide triple tax benefits to contributors: tax-deductible contributions, tax-free growth of investments and tax-free spending (at the federal level) on qualified medical expenses now and throughout retirement. State tax rules for HSAs vary.
Fidelity Investments estimates that a 65-year-old couple retiring today will need an average of $315,000 for medical expenses throughout retirement. Single retirees will need $150,000 for men and $165,000 for women. These are big, scary numbers.
It gets worse. A staggering 70% of respondents to Fidelity's survey felt unprepared to cover those expenses during retirement once informed of the amounts.
The good news? Nearly half of those with HSAs felt prepared. Of those who don't have HSAs, only 27% felt they were ready.
HSA-Eligible Health Plan Rules
Also rising in 2023: HSA-eligible health plan deductibles and maximum out-of-pocket amounts. For an individual, the plan deductible needs to be at least $1,500 (up $100 from 2022); for a family $3,000 (up $200 from 2022). And eligible plans must not exceed the maximum out-of-pocket amounts: $7,500 (up $450 from 2022) and $15,000 (up $900 from 2022) for an individual and a family, respectively.
Affordable Care Act health plans have a separate set of limits, excluding grandfathered plans. Maximum out-of-pocket amounts for an individual and a family are higher, at $9,100 and $18,200, respectively. Finally, people 55 and older are eligible for catch-up contributions of $1,000 in 2023, the same as in 2022.
Both employees and individuals can make HSA contributions. In addition, an employer can choose to add to an employee's contribution, similar to 401(k) plans. And parents and grandparents may also contribute to a beneficiary's HSA account. In this case, the beneficiary can still deduct the contributions from his or her taxes. The total amount of the contributions, however, cannot exceed the annual limits set for the year.
Many employers start open enrollment in November for the following plan year. But you can enroll any time in an HSA, as long as you have an HDHP.
So, even if you missed the open enrollment period, or you're self-employed, you can still open an HSA. You can contribute money into a prior-year HSA account until the following year's April 15 tax-filing deadline.
Our 13 Best HSA Accounts For 2023 can help you chose a plan. This year's list includes giants like Fidelity and smaller providers such as Liberty Federal Credit Union.
Covered Medical Expenses
Beware of the many myths and misconceptions about what you can and cannot do with an HSA — read our Top 10 HSA Misconceptions, 2023 HSA Rules. An important one to know is that you don't have to go with your employer's plan. You can switch to another HSA account provider or add other HSA plans as you go along.
As to what the IRS considers qualified medical expenses, the list keeps growing every year, making HSAs all the more enticing. In addition to covering copays, doctor visits and prescriptions, HSA funds can also be used to reimburse dentists, pay for preventive care, cover medical imaging and pay for over-the-counter drugs and treatments not covered by your health insurance.
HSA-eligible expenses include acupuncture, acne laser treatment, ambulance and emergency care, birth control pills, blood pressure monitors, hearing aids, infertility treatment, inpatient drug and alcohol treatments, allergy medicine, pain relievers, smoking cessation products, thermometers, vasectomies and wheelchairs.
Pending HSA-Related Legislation
Telemedicine is another benefit that might be here to stay. First introduced in 2020 during the pandemic, the rule has been extended several times. Now it's part of a bipartisan bill to make it permanent. The proposed bill allows for a first-dollar HSA coverage of telehealth, without having to meet a deductible.
In addition, the recently passed Inflation Reduction Act provides a safe harbor for insulin products, says Nicky Brown, vice president of advocacy and government affairs at HealthEquity. "(It) allows HSA-qualified (insurance) plans to cover insulin and related products below the plan deductible.
"Many employers are already offering (help for the cost of) insulin in their (insurance) programs. This legislation would codify the practice with respect to insulin," said Brown. In other words, HSA/high-deductible health plan holders wouldn't have to pay their high deductibles before they get insulin coverage. Instead, with some insurance plans, they'll pay a copay for insulin that's below the deductible, without disqualifying the plan as a high-deductible, HSA-qualified plan.
Besides making HSA contributions, savvy consumers use their HSAs to cover routine and unexpected medical costs, as well as invest for the future.
"I've had an HSA account for five years now," said Kelly Zimmermann from North Bend, Wash. Her account is with HealthEquity. "My employer puts in quite a bit, and then I try to at least match that every year."
Zimmerman says she keeps $1,000 liquid in the account and invests the rest. "We are a family of four so we use it all the time to cover prescriptions, over-the-counter meds, copays and doctor visits until I reach my deductible," she said. "I really like knowing that an ER visit won't crush my monthly budget. And the (remaining) HSA (funds) roll over year to year. I like to keep it growing as much as possible for unexpected future costs."
Spend Or Invest Your HSA Contributions?
While HSAs are great spending vehicles, account holders can invest the money and let it grow tax-free. Depending on the account provider, HSAs can invest in stocks, ETFs or mutual funds. With interest rates up significantly this year, several HSA providers also offer very attractive savings rates.
"We've seen more people invest over the last few years," said Begonya Klumb, Fidelity's head of HSAs. "If we hadn't had a down market, you would have seen the invested portion of HSA assets grow twice as much as the overall assets."
Devenir reported that HSA investments increased 2% year over year to $31 billion at the end of June. This represented 31% of all HSA assets. HSA investment accounts held an average total balance of $16,220, which is 6.8 times higher than the average account balance of a noninvestment account holder.
"An HSA can be a huge source of retirement planning," said Kevin Crain, head of retirement research and insights at Bank of America. Employers should be educating their employees about the long-term benefits of an HSA: "Employees can leave money in an HSA and invest it and it will grow to be a significant asset for them for the long term," said Crain.
To help spenders and investors alike, HSA providers have been adding more and more features. From fractional share investing, to innovative apps, all-in-one accounts, a self-directed brokerage option or professional management, contributors have plenty of options to choose from.
The underlying trend is for the investment portion of HSAs to continue to go up, said Fidelity's Klumb. "Generally, we see that those people who invest tend to have higher balances as well."
Klumb added: "It's all part of awareness and education. When people understand the value of an HSA, they save more and they invest more."
Click here to view IBD's 2021 list of the Best HSA Accounts.
