HSAs as investments on the rise, but use still low

Health savings accounts are a favorite among financial advisors, but research published Thursday reinforces what many have long known: HSAs are largely used like checking accounts, and assets are sparingly invested.

That, according to new data from the Employee Benefit Research Institute, indicates that few people are taking full advantage of the "triple tax benefits" of HSAs. For those accounts, there are no taxes on contributions, appreciation, or withdrawals for eligible expenses.

“HSAs are an incredibly valuable tax-managed vehicle,” said Jake Spiegel, research associate at EBRI. While the general guidance is for people to invest their HSA assets and leave the funds untouched until retirement, that strategy isn’t necessarily appropriate for everyone, particularly for individuals and families who may not have the cash to pay for medical expenses out-of-pocket, he said.

“It’s best to avoid getting into persistent debt, if you have money in an HSA you can use,” Spiegel said.

Data from the report show that in 2022, more than half of HSA owners withdrew funds, with the average distribution amount at nearly $1,900. That year, the average account represented about $4,600, up from over $4,300 in 2021.

While account owner contributions increased, going from an average of $1,880 to $1,962, employer contributions fell from $793 to $762. For comparison, average employee contributions were $2,011 in 2013, and employer contributions were $1,176, according to EBRI.

In 2022, the IRS contribution limit for individual HSAs was $3,650, and $7,300 for those with family coverage.

While HSAs are touted by providers and financial experts for their use as investment accounts, only 13 percent of owners used them in that capacity in 2022, EBRI found. Even so, that's a dramatic increase from several years ago, as 12 percent of accounts were invested in 2021 and just 2 percent in 2011.

“The longer people have their HSAs, the more likely they are to use them in that optimal way that talking heads on CNBC [explain],” Spiegel said. “People [might just] need a little bit of time to figure out how HSAs fit into their finances.”

EBRI’s database includes figures reported by numerous record keepers, and it spans a range of different types of HSA owners, the group said. The database covered 14 million accounts in 2022, representing about $42.5 billion in assets.

Last year, total assets in HSAs reached $123.3 billion across more than 37 million accounts, up from $104 billion in just under 36 million accounts in 2022, according to a report this week by HSA investment firm Devenir, Of the total assets in 2023, 37 percent, or $46.4 billion, was invested, while $76.9 billion was in cash, according to that report.