Jack Towarnicky
HSAs - how did we get… here?
February 02, 2024
By Jack Towarnicky
If America could successfully get to the moon and back over 54 years ago, it makes me wonder, what can stand in our way today when it comes to health coverage?
In a single word, inertia!
Perhaps unintentionally, Congress added various new tax preferences for health coverage – such as Internal Revenue Code Section 125 (IRC §125) cafeteria plans in 1978. It was a great example of “they know not what they do”! For example, in the 1978 Joint Committee on Taxation report, adding IRC §125 was scored as: “Revenue effect: This provision will have no effect upon budget receipts.” Yes, Congress concluded adding pre-tax cafeteria plan contributions would have no impact on federal budget revenues.
Today, IRC §125 is part of the largest federal “tax preference” – pre-tax contributions via cafeteria plans are approximately 25% of the total exclusion from federal revenue resulting from employer-sponsored medical benefits. Pre-tax contributions will reduce federal revenues by almost $1 trillion for the ten-year budget period 2023 – 2032.
Similarly, the Medicare Modernization Act of 2003 added Health Savings Accounts (HSAs). Congress may have thought it had learned its lesson. They were so concerned about the HSA’s tax preferences, that they scaled back the initial HSA proposal so the 10-year budget impact (2004 – 2013) was estimated to be $6 billion. However, the actual “tax expenditure” for 2013 alone exceeded $2 billion. And, the projected “tax expenditures” for the ten-year budget period 2023 – 2032 for HSAs/MSAs is estimated at $178+ billion!
The Health Savings Account is America’s most valuable, tax preferred benefit!
BUT, if you are like most plan sponsors who offer health coverage to your employees, neither you nor your workers have received even ONE CENT of the HSA’s tax breaks over the past 20 years. You’ve missed out! According to the 2023 Kaiser survey, only 53% of firms offer health coverage, and of those who offer health coverage, only 24% offer HSA-capable coverage. For you actuaries out there, .53 * .24 = .13 or 13% of all firms with employees captured in the Kaiser survey offered an HSA-capable coverage option.
Worse, while only 13% of firms offered HSA-capable coverage, most employers offer HSA-capable coverage as one of multiple health choices. And, unsurprisingly, where workers have a choice, most do not select the HSA-capable coverage option. Average spend on medical services for more than 50% of Americans is less than $400 a year. Because most workers never meet their deductible, a super majority are “over-insured”!
Consistent with the tagline of a Liberty Mutual commercial, employers should offer and workers should select coverage so everyone ‘only pays for what they need.’ Excluding Medicare-eligible Americans (age 65+ and disabled), health expenditure data suggest that over 80% of Americans with employer-sponsored coverage spend less than $1,000 a year on medical services.
The HSA marketplace
Starting from zero, we’ve seen dramatic growth in the number of HSA accounts and assets. It looks impressive, but it only represents a small percentage of America’s employers and their workers. Consider the mid-year 2023 Devenir report:
HSA Account Growth: Midyear 2023, there were 36 million HSA Accounts, a year-over-year 6% increase.
Growth in Assets: Midyear 2023, there were $116 billion in HSA assets, a year-over-year 17% increase.
Lack of Investing: However, a super-majority of HSA accounts are invested only in capital preservation investments/deposits.
When you drill down into the data, the significance of the missed opportunity is apparent - including the following trends:
• HSA Participation: Only 50% of eligibles contribute to their HSA, unchanged since 2017,
• HSA Contributions: Average annual individual contributions declined to $1,880 in 2021.
• HSA Investments: In 2021, 88% of accounts remained in capital preservation (money market) funds.
Maximum utility
HSA thinking has evolved to become part of an organization’s “health and wealth” rewards strategy.
One of the most valuable baseball players in any pennant chase is a “Five Tool” utility player - one who can perform at a superior level at multiple positions in the field, and at the plate. In everyday life, that’s akin to a Swiss Army Knife or a Leatherman tool.
In employee benefits, the “Five Tool” utility player is the Health Savings Account – generating superior outcomes in satisfying multiple needs:
1. Now (before retirement)—Fund current medical, dental, vision, hearing, and long-term care (LTC) out-of-pocket expenses, Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage and LTC premiums,
2. Future (during retirement) - The same as above
3. Future (during retirement) – Fund Medicare Part B and D and Medicare Advantage premiums, including Income Related Monthly Adjustment Amounts (IRMAA)
4. Future (retirement income) - HSA assets withdrawn after age 65 avoid penalty taxes and qualify for better tax preferences than those afforded to 401(k) contributions, and
5. Future (legacy) – There is no required minimum distribution. There are no forfeitures. A surviving spouse or non-spouse dependent designated beneficiary can continue to receive tax-preferred HSA benefits. Other beneficiaries will ultimately receive any residual assets as a taxable payout.
Solve for tomorrow, not for yesterday!
It’s too late to say you’re sorry!
In a 2004 strategy session, I was called upon to help evaluate the HSA’s potential as a business opportunity. I boldly predicted: “Twenty-five years ago, no one had ever heard of 401(k); 25 years from now, everyone will have an HSA.” Unfortunately, I failed to account for inertia.
Today, early adopters of HSA-capable health plans have significant account balances – including a handful whose account balance exceeds $200,000. Assuming no change in statutes or regulations, by 2030, we will have our first household with HSA accounts totaling over $1 Million!
While you can’t overcome missed opportunities of the past, don’t compound the mistake. It is time, right now, to investigate how Health Savings Account-capable coverage could offer superior value to your organization and your workers.
About the author: Jack M. Towarnicky is a member of aequum LLC. As an ERISA/Employee Benefits compliance and planning attorney, Jack has over forty years of experience in human resources and plan sponsor leadership roles. This includes twenty-five years as the leader of a Fortune 100 corporation’s benefits function. While serving in those roles, Jack and his team won a multitude of individual, team and corporate recognitions. In 2020 Jack joined aequum and provides plan drafting and compliance services to employers and plan sponsors.
If America could successfully get to the moon and back over 54 years ago, it makes me wonder, what can stand in our way today when it comes to health coverage?
In a single word, inertia!
Perhaps unintentionally, Congress added various new tax preferences for health coverage – such as Internal Revenue Code Section 125 (IRC §125) cafeteria plans in 1978. It was a great example of “they know not what they do”! For example, in the 1978 Joint Committee on Taxation report, adding IRC §125 was scored as: “Revenue effect: This provision will have no effect upon budget receipts.” Yes, Congress concluded adding pre-tax cafeteria plan contributions would have no impact on federal budget revenues.
Today, IRC §125 is part of the largest federal “tax preference” – pre-tax contributions via cafeteria plans are approximately 25% of the total exclusion from federal revenue resulting from employer-sponsored medical benefits. Pre-tax contributions will reduce federal revenues by almost $1 trillion for the ten-year budget period 2023 – 2032.
Similarly, the Medicare Modernization Act of 2003 added Health Savings Accounts (HSAs). Congress may have thought it had learned its lesson. They were so concerned about the HSA’s tax preferences, that they scaled back the initial HSA proposal so the 10-year budget impact (2004 – 2013) was estimated to be $6 billion. However, the actual “tax expenditure” for 2013 alone exceeded $2 billion. And, the projected “tax expenditures” for the ten-year budget period 2023 – 2032 for HSAs/MSAs is estimated at $178+ billion!
The Health Savings Account is America’s most valuable, tax preferred benefit!
BUT, if you are like most plan sponsors who offer health coverage to your employees, neither you nor your workers have received even ONE CENT of the HSA’s tax breaks over the past 20 years. You’ve missed out! According to the 2023 Kaiser survey, only 53% of firms offer health coverage, and of those who offer health coverage, only 24% offer HSA-capable coverage. For you actuaries out there, .53 * .24 = .13 or 13% of all firms with employees captured in the Kaiser survey offered an HSA-capable coverage option.
Worse, while only 13% of firms offered HSA-capable coverage, most employers offer HSA-capable coverage as one of multiple health choices. And, unsurprisingly, where workers have a choice, most do not select the HSA-capable coverage option. Average spend on medical services for more than 50% of Americans is less than $400 a year. Because most workers never meet their deductible, a super majority are “over-insured”!
Consistent with the tagline of a Liberty Mutual commercial, employers should offer and workers should select coverage so everyone ‘only pays for what they need.’ Excluding Medicare-eligible Americans (age 65+ and disabled), health expenditure data suggest that over 80% of Americans with employer-sponsored coverage spend less than $1,000 a year on medical services.
The HSA marketplace
Starting from zero, we’ve seen dramatic growth in the number of HSA accounts and assets. It looks impressive, but it only represents a small percentage of America’s employers and their workers. Consider the mid-year 2023 Devenir report:
HSA Account Growth: Midyear 2023, there were 36 million HSA Accounts, a year-over-year 6% increase.
Growth in Assets: Midyear 2023, there were $116 billion in HSA assets, a year-over-year 17% increase.
Lack of Investing: However, a super-majority of HSA accounts are invested only in capital preservation investments/deposits.
When you drill down into the data, the significance of the missed opportunity is apparent - including the following trends:
• HSA Participation: Only 50% of eligibles contribute to their HSA, unchanged since 2017,
• HSA Contributions: Average annual individual contributions declined to $1,880 in 2021.
• HSA Investments: In 2021, 88% of accounts remained in capital preservation (money market) funds.
Maximum utility
HSA thinking has evolved to become part of an organization’s “health and wealth” rewards strategy.
One of the most valuable baseball players in any pennant chase is a “Five Tool” utility player - one who can perform at a superior level at multiple positions in the field, and at the plate. In everyday life, that’s akin to a Swiss Army Knife or a Leatherman tool.
In employee benefits, the “Five Tool” utility player is the Health Savings Account – generating superior outcomes in satisfying multiple needs:
1. Now (before retirement)—Fund current medical, dental, vision, hearing, and long-term care (LTC) out-of-pocket expenses, Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage and LTC premiums,
2. Future (during retirement) - The same as above
3. Future (during retirement) – Fund Medicare Part B and D and Medicare Advantage premiums, including Income Related Monthly Adjustment Amounts (IRMAA)
4. Future (retirement income) - HSA assets withdrawn after age 65 avoid penalty taxes and qualify for better tax preferences than those afforded to 401(k) contributions, and
5. Future (legacy) – There is no required minimum distribution. There are no forfeitures. A surviving spouse or non-spouse dependent designated beneficiary can continue to receive tax-preferred HSA benefits. Other beneficiaries will ultimately receive any residual assets as a taxable payout.
Solve for tomorrow, not for yesterday!
It’s too late to say you’re sorry!
In a 2004 strategy session, I was called upon to help evaluate the HSA’s potential as a business opportunity. I boldly predicted: “Twenty-five years ago, no one had ever heard of 401(k); 25 years from now, everyone will have an HSA.” Unfortunately, I failed to account for inertia.
Today, early adopters of HSA-capable health plans have significant account balances – including a handful whose account balance exceeds $200,000. Assuming no change in statutes or regulations, by 2030, we will have our first household with HSA accounts totaling over $1 Million!
While you can’t overcome missed opportunities of the past, don’t compound the mistake. It is time, right now, to investigate how Health Savings Account-capable coverage could offer superior value to your organization and your workers.
About the author: Jack M. Towarnicky is a member of aequum LLC. As an ERISA/Employee Benefits compliance and planning attorney, Jack has over forty years of experience in human resources and plan sponsor leadership roles. This includes twenty-five years as the leader of a Fortune 100 corporation’s benefits function. While serving in those roles, Jack and his team won a multitude of individual, team and corporate recognitions. In 2020 Jack joined aequum and provides plan drafting and compliance services to employers and plan sponsors.