Health savings accounts (HSAs) allow money to be set aside to pay for future medical expenses. A key advantage of HSAs is their tax treatment. Contributions to these accounts are tax-free. Distributions are tax-free regardless of how much capital appreciation, dividend income or interest income has been realized as long as the dollars are spent on qualified expenses.

Despite these advantages, most people do not treat their HSAs as a tax-preferred investment account. Rather, account owners appear to be treating their HSAs as checking accounts designated for covering current expenses, such as deductibles, coinsurance and copayments, according to the Employee Benefit Research Institute (EBRI). This behavior prevents account holders from realizing the long-term benefits of HSAs.

The ERBI reach this conclusion after analyzing its database. The database contains 5.5 million accounts, equivalent to 27% of the HSA universe and 31% of HSA assets. The ERBI describes its database as including “data provided by a wide variety of account record-keepers” and, therefore, representative of “the characteristics and activity of a broad range of HSA owners.”

Nearly two-thirds of account holders (63%) withdrew funds last year. The average amount distributed from HSAs was $1,771. Individual contributions averaged $1,987 in 2016, while employers, on average, added $935.

Just 4% of all accounts had investments in assets other than cash. Just 1% of accounts opened in 2016 held another asset beyond cash. In contrast, 11% of accounts opened in 2005 held assets other than cash.

The ERBI lists a few reasons why HSA owners are not allocating beyond cash. Balances in many accounts, particularly newer ones, are not large enough to meet the minimum requirements for investing. Accounts opened in 2016 had an average balance of $1,027 at year-end 2016 versus $4,970 for those opened in 2010 and $14,873 for those opened in 2004. Not all HSAs offer investment options beyond cash. Even when the HSA provider does offer investment options, not all HSA owners may be aware of them. Finally, account owners may be relying on their HSAs to cover out-of-pocket medical expenses and therefore prefer the safety of cash over the potential volatility of other investment options.

Source: “Trends in Health Savings Account Balances, Contributions, Distributions, and Investments, 2011–2016,” Paul Fronstin, Ph.D., Employee Benefit Research Institute, July 11, 2017.

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