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Most workers aren't using this key retirement tool to the fullest

Health savings accounts (HSAs) can be a vital part of retirement savings, but many workers aren’t using them to their maximum benefit.

Of the 13 million HSAs in the Employment Benefit Research Institute’s (EBRI) database, only 12% of the account holders invested their HSAs in assets other than cash. The disparity in benefits is stark. The average HSA balance among those who invest is 10 times the size of HSA balances that aren’t invested.

That means many workers are missing out on a savings vehicle that offers triple tax advantages and can pad their retirement savings down the road.

“HSAs are in really early days, so people are not familiar with them,” Jake Spiegel, an EBRI research associate with the organization’s health and wealth benefits research department and co-author of the study, said. “If employers provide more educational seminars, that may lead more people to invest in HSAs.”

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(Photo: Getty Creative) (skynesher via Getty Images)

HSA account holders don’t invest as much as they should

Health savings accounts are only available to individuals enrolled in a high-deductible health care plan (HDHP). While the funds saved in these plans can help people cover the deductible before their insurance coverage kicks in, the account also can help with longer-term retirement savings.


That’s because funds in these accounts have three major tax advantages: contributions are tax deductible; earnings grow tax free; and withdrawals for eligible health expenses are tax free. Ineligible withdrawals are subject to a 20% penalty. But when you reach 65, you can withdraw for any reason without penalty.

Funds in HSAs can also be invested to maximize their values.

For instance, EBRI found that the average balance of HSAs with invested assets was $23,997 in 2021, compared with $2,458 for HSAs with no invested assets. Balances of invested HSAs also grew by $4,817 on average, versus $124 for uninvested HSA balances.

(Credit: EBRI)
(Credit: EBRI)

Strict investment requirements could keep some account holders from investing, especially those who are just passively contributing to their HSAs. That could account for some of the difference between the average contribution amount between those who invest and those who don’t.

“HSA providers require balances of $1,000 before investment,” Spiegel said. “It tends to weed out people who aren’t actively engaged.”

Spiegel also noted that account holders also don’t want to invest in assets other than cash because they want to use the HSA funds more frequently for medical expenses.

“If people are using it as a spending vehicle, they don’t want to invest in risky assets if they want to spend their balances on chronic conditions,” Spiegel said.

In that case, though, account holders can invest their HSA funds in less risky assets such as certificates of deposit (CDs), money market funds, or bonds.

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( Photo Credit: Getty Creative) (Boy_Anupong via Getty Images)

Another interesting difference among invested HSAs versus uninvested ones is the employer contribution. The average employer contribution is $281 more for HSAs with invested assets than ones without.

“Employers that offer contributions to HSAs have account holders who have more benefits and they’re more likely to invest. They’re more comfortable investing. They’re predisposed to be more engaged in their HSAs,” Spiegel said.

In that way, employers can play a big role in helping their workers maximize the benefits of HSAs. First is providing the needed education, especially among younger employees.

Spiegel noted that younger workers don’t contribute to their HSAs as much because they may not be as informed about the value of the accounts and they don’t have as many health issues as older account holders.

“Younger workers tend to be healthier and it’s not a salient issue for them,” said Spiegel.

Another barrier to HSAs may be confusion with another type of health savings account called flexible savings accounts (FSAs), Spiegel said. Flexible savings accounts are similar to HSAs in that savings in those accounts can be used to offset medical expenses. But contrary to HSAs, funds in FSAs cannot roll over from year to year and aren’t typically invested.

“If employers provide more educational seminars, that may lead more people to invest in HSAs,” Spiegel said.

Verlinda DiMarino is vice-president and director of the benefits program at Liberty Mutual Insurance. She told Yahoo Finance that she makes sure that employers like hers educate their employees about HSA benefits.

( Photo Credit: Getty Creative)
( Photo Credit: Getty Creative) (Maskot via Getty Images)

“We educate our employees when they have their annual benefit enrollment. We also have financial advisors that also work with our employees to help them understand their HSAs, “ DiMarino said.

Once they learn more about HSAs, they’re eager to make more contributions.

“Employees are excited about a savings vehicle that’s not subject to state tax,” DiMarino said.

Spiegel said that programs like Liberty Mutual’s financial education can help workers realize how valuable the accounts can be to their healthcare and retirement goals.

“The longer you hold HSAs, the more you benefit,” Spiegel said. “The longer you contribute, the more you maximize benefits.”

Ella Vincent is the personal finance reporter for Yahoo Finance. Follow her on Twitter @bookgirlchicago.

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