Health Savings Accounts (HSAs) have been an integral part of health insurance and employer benefit offerings for almost 20 years. Signed into law in 2003, HSAs were created to help individuals covered under a compatible health plan, known as a high-deductible health plan (HDHP), set aside funds on a tax-free basis to pay both current and future medical expenses, allowing Americans to be more empowered healthcare consumers and better prepared for their retirement expenses.
HSAs continue to grow exponentially. As of June 30, 2020, according to research conducted by Devenir, an estimated $73.5 billion is held in more than 29 million HSAs. The incredible growth of HSAs since their inception points to the improved spending and saving experience for the employee, while showing measurable value for employers as well. Despite the uncertainty of 2020, HSAs have become integral to employee benefits, and 2021 will continue to see positive evolution of this healthcare, savings and retirement solution.
Why HSAs?
In addition to helping cover out-of-pocket expenses and deductibles, HSAs play a major role in saving and preparing for retirement. Healthcare is one of the largest expenses that participants will face during retirement. HealthView Services estimates that in 2020, a healthy, average couple age 65 will spend $662,156 on retirement healthcare expenses. Using an HSA is the most tax-advantaged way to save and pay for future healthcare expenses. Increasingly more and more consumers are using their HSAs for investment and retirement planning.
HSAs have become a true vehicle for investment savings and retirement planning. They are the only triple-tax advantaged account in existence, meaning funds are contributed tax-free, grow tax-deferred and can be withdrawn tax-free to pay for IRS-qualified medical expenses tax-free during an individual’s working years and in retirement. This is a significant advantage over traditional retirement options, which are subject to income tax when withdrawn.
Moving into 2021, health insurance companies have an opportunity to continue to increase engagement and education by focusing on the overall consumer experience and journey.
2020 Impacts to HSAs
Earlier this year, the United States Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act guarantees reimbursement for any FDA approved coronavirus test and stipulates several other relief efforts including stimulus checks and small business and economic disaster loans. HSAs also received expanded benefits under the CARES Act.
The CARES Act now ensures that individuals with an HSA or FSA can make tax-qualified purchases on hundreds of over-the-counter (OTC) products like cold and flu medications without a prescription. In addition, HSA-qualified HDHPs may now cover telehealth services before reaching the deductible, or an individual can choose to purchase use of telehealth services outside of their HDHP, without impacting their eligibility for an HSA. While the OTC change is permanent, the telehealth exemption is valid until December 31, 2021.
The pandemic and the CARES Act have strengthened employee demand for affordable healthcare plans and extended a hand to those in need. In fact, according to a recent Jellyvision survey report, 59% of employees plan on paying more attention to employee benefits in the current climate. As the country emerges from the pandemic, it's anticipated that employees will apply an even more scrupulous eye to their insurance plans, so employers will need to be prepared with a robust and differentiating offer such as HDHPs and HSAs as an option that can both decrease their costs and improve access to cost-effective healthcare for their employees.
COVID-19 has also taught people the importance of setting aside funds for emergencies, recognizing that job losses can happen suddenly, and that medical expenses rank among the leading contributing causes of bankruptcies in the U.S. Consumers today express less confidence in managing their health financing needs. According to the third annual HSA Bank Health & Wealth IndexSM, just 15% of 2,000 respondents said they regularly save money for future healthcare expenses.
This year’s open enrollment period served as an opportunity to help employees and their families meet their healthcare needs and achieve a healthy financial future. Many shifted to a virtual open enrollment environment, and anecdotally, it has been a success. Employees were able to take the time to review and digest information and options, including possible incentives employers might offer; involve all family decision makers in the open enrollment process; and take advantage of available online tools, such as videos/presentations, webinars, virtual group discussion, and decision support tools. With more knowledge, employees can best utilize their plans to maximize savings and services and become better consumers by inquiring about and comparing costs before receiving services or prescriptions throughout the year.
Changes in 2021
Communicating changes to employees will be especially important in 2021. For example, the Internal Revenue Service (IRS) recently announced increased HSA contribution limits and HDHP deductible limits for 2021:
- The HSA contribution maximum for individuals has increased to $3,600 and for families has increased to $7,200.
- The HDHP minimum deductible for individuals will be $1,400 and for families $2,800.
- The HDHP out-of-pocket maximum will be $7,000 for individuals and $14,000 for families.
While these updates happen yearly, COVID-19 has shown that employers must be adaptable, forthcoming and inclusive when it comes to education and communication.
Future Possibilities: Decoupling HSAs and Medicare Expansion
The COVID-19 pandemic has brought the importance of affordable healthcare solutions, such as HSAs, into the forefront of many Americans’ minds. However, under current law only about 30 percent of Americans have access to HSAs.
There is a narrowing gap of deductible amounts associated with HDHPs as compared to Preferred Provider Organizational (PPO) plans and almost all other types of health plans. In fact, the average traditional health plan deductible today exceeds the threshold to be qualified as an HSA-compatible plan. And as such, the requirement for an individual to have coverage under an HDHP may have lost its relevancy. With this possible change of HSA coverage to those with any private or employer health insurance plan, millions more Americans could have the opportunity to prepare for healthcare expenses today and in retirement. If all Americans with public or private health insurance plans were eligible for an HSA, virtually all Americans could benefit from tax-free health savings, helping everyone better address current expenses and save for their future needs.
In addition, people are working longer, saving less, and facing higher out-of-pocket costs even in Medicare. Under current law, as soon as an employee becomes a senior on Medicare, enrollees can no longer open or contribute to an HSA. This is under consideration for change. If the change happens, it would allow seniors to better afford unanticipated costs while enrolled in Medicare.
Summary
HSAs are evolving, and there are significant proposals underway that could affect both their application and advantages. In addition, the industry needs to continue to work together to educate not just during open enrollment, but throughout the year.
The key components of consumer-directed healthcare are guidance, transparency, and empowerment. Employees should take ownership of the physical and financial aspects of their healthcare by utilizing decision-support tools to create heightened awareness of and to assist with planning for healthcare expenses. Employers should also play an active role in supporting their employees and look to provide access to tools and active enrollments to help employees understand which plan provides the most adequate coverage, while also balancing cost to help their employees have a successful 2021 and beyond.
Kevin Robertson serves as Senior Vice President, Chief Revenue Officer, where he is responsible for leading the growth strategy and organization at HSA Bank.