HSAs have made progress, but there's still room for more

While HSA providers have made great strides in making those tax-advantaged investment accounts more investor-friendly, there's still room to make improvements, according to the latest report by Morningstar.

Morningstar’s latest study on health savings accounts started on a positive note, reporting a new $123 billion record for the space in 2023. That came amid efforts to make HSAs more appealing, including lower fees and expanded investment options.

A major win for everyday Americans, according to the eighth annual study on the HSA industry, came from reductions in both spending and investment account fees. Based on Morningstar's survey of nearly a dozen providers, the average fee for investment options dropped from 0.29 percent in 2022 to 0.24 percent in 2023, continuing a trend of cost-cutting from recent years. Meanwhile, fewer providers are charging maintenance fees on spending accounts, with seven of the 11 surveyed no longer imposing those fees.

“Efforts by providers to enhance HSA offerings have proven beneficial for investors,” Greg Carlson, senior manager research analyst at Morningstar said in a statement. However, the complexity of managing these accounts continues to be a challenge for many users.

HSAs, particularly when coupled with high-deductible health plans, provide unique tax advantages including tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. In 2025, HSA contribution limits will increase to $4,300 for individuals and $8,550 for families, which Morningstar noted would boost their appeal for those looking to lighten the lifetime burden of healthcare expenses.

The study also notes pending legislation that could expand the value of HSAs. If passed, that would allow individuals to make HSA contributions even if their spouse uses a flexible spending account. Additionally, the proposed changes would enable fund rollovers from certain FSAs or health reimbursement arrangements into HSAs.

Despite the rise in the HSA industry, the report identified several areas needing improvement. One issue is that many providers still require a minimum balance – in some cases reaching $2,000 – before participants can invest. The report argues this creates a barrier for users looking to maximize long-term savings, particularly since the average American spends around $13,500 annually on healthcare, limiting their ability to maintain high balances.

Morningstar also emphasized more can be done to increase awareness of HSA investment features. Beyond simplifying account-opening processes, the report suggests that providers can improve participant education about transferring between spending and investment accounts. Permitting automatic enrollment in HSAs, which is already a staple across many workplace retirement plans, could also raise adoption among investors.