Benefits and Compensation

Employees Not Taking Full Advantage of HSAs, Says Willis Towers Watson Survey

Many employees with health savings accounts (HSAs) are failing to capitalize on the full potential of these tax-advantaged accounts, according to a recent study by Willis Towers Watson (WTW).hsa

Nearly half (43%) of employees with HSAs did not contribute any of their own money to them, WTW found in its 22nd annual Best Practices in Health Care Employer Survey. Now that nearly three-fourths (73 %) of employers are offering an HSA paired with a high-deductible health plan (HDHP), this means many are missing an opportunity to reduce their out-of-pocket healthcare costs and potentially save for retirement.

“HSAs are an attractive way for employees to set aside pretax money for qualified medical expenses,” said Trevis Parson, chief actuary for WTW Health and Benefits North America, in a press release. “In addition to being able to contribute money to these accounts without paying federal or state taxes on it, money in these accounts grows tax-free and, as long as it is used for qualified medical expenses now or in the future, can be withdrawn tax-free.”

The study suggests that employers can do more to educate employees on HSAs’ tax advantages and encourage them to save toward their medical and retirement needs, Parson added.

To encourage greater participation, most employers that offer HSAs (62%) are giving employees a head start by contributing seed money, WTW reported. In 2017, median seed amounts ranged from $300 to $750 for employee-only coverage and $700 to $1,400 for family coverage, depending on whether employers offered automatic seed money or automatic plus “earned” seed money.

“Whether an HSA is appropriate as a retirement savings vehicle should be evaluated on a case-by-case basis, taking into account the total picture of an employee’s income and plans for retirement,” said Parson. “However, if the situation allows it, employees should contribute to their HSAs to realize the tax advantage of funding more immediate qualified medical expenses, which would otherwise have to be paid with after-tax income.”

The survey also found that HSAs associated with HDHPs are continuing to grow in popularity among employers, with 83% expecting to offer them by 2019. The annual survey was completed by 698 U.S. employers between June and July 2017 and reflects respondents’ 2017 health program decisions and strategies.

Lessons Learned

WTW came away with three major recommendations for encouraging more employees to contribute their own money to HSAs:

  1. Communicate with employees early, often, and through multiple channels to make sure they understand the tax advantages and versatility of HSAs.
  2. Seed HSAs with automatic or earned money as further incentive for employees to enroll in HDHPs and contribute their own money to their HSAs.
  3. Provide employees with decision support tools to help them estimate tax effects, current and future healthcare costs, and longevity needs to determine at what age they can achieve financial independence. “Decision support tools that engage employees at the moment they are selecting and enrolling in benefit plans can be especially helpful in encouraging them to manage their assets wisely,” said David Speier, WTW managing director for benefits accounts.

HSAs are available only to individuals enrolled in an HDHP. Employers can contribute to HSAs, but employees own the accounts and the money in them. The entire balance of an HSA rolls over each year, and the money used to pay qualified medical expenses is always tax-free, even after an employee retires. Once an employee reaches the age of 65, the funds can be used for any qualified purpose but are subject to income tax if purchases are not HSA-eligible.