How HSA Growth is Impacting the Financial Services Industry
Insights from Harland Clarke’s First Annual HSA Survey
Contributed by: Philip Armstrong, Sr. Market Strategist, Harland Clarke
By Design or Unintentional Consequences
When you look at the history of 401Ks and HSAs, their origins have similar intentions - to help Americans prepare for a retirement that the government and employers are placing more squarely on their backs.
Ted Benna, the “Father of the 401K,” initiated its birth in the late 70s. When Congress passed the Revenue Act of 1978 with a provision in it – section 401K – he branded the most significant retirement vehicle about to replace the defined pension plan.
This law went into effect in January 1980, helping launch the boom-boom 80s. Benna saw an opportunity in the legislation to create a tax-advantage savings account for company employees. Looking back 30+ years later, he never intended this to be the “primary” way for employees to accumulate money for retirement and ultimately be a boom to Wall Street.
And yet, this new product became a way for employers to un-shackle themselves from costly, guaranteed for life, pension plans. In just two years, more than 50 percent of large companies were offering the investment plan.
With two bull markets in the 80s and 90s, over a 15-year time frame, 401K assets grew to more than $1 trillion with 30 million active participants. Compare that to HSAs over a similar period of time. Devenir projects in 2020 HSAs will top $77 billion in assets with 29 million account holders.
Clearly, there are some “shackles” on the HSA – which some could argue is a better savings vehicle than a 401K from a tax perspective – that are holding it back. Let’s count the links of the chain:
A limited number of people can participate. To be eligible, you must have a high deductible health plan. That immediately eliminates more than half of America.
Compared to 401ks, annual contribution levels are not even close for HSAs. For 401Ks, they are more than three times greater. (2020 HSA contribution limits for individuals is $3,550 and families is $7,100 with an additional “catch-up” contribution of $1,000 for 55+ individuals)
HSAs offer limited use for qualified expenses. And maintaining receipts is a must for any potential IRS audits.
Medicare aged Americans are excluded. The group that continues to work past age 65 cannot take advantage of this tax savings vehicle.
These are the most notable limitations, but there are more to consider.
HSAs – It Takes a Pandemic?
Unlike the birth of the 401K, HSAs were born thru many surrogate parents pushing the adoption of this new health/wealth retirement account. In fact, many of those people are now part of the American Bankers Association HSA Council, helping promote to Congress, the IRS, State Legislatures, and the media the benefits and rewards of fully embracing the HSA.
In light of the current pandemic, suddenly we all are concerned about our health and the health of the world. Imagine if HSAs had grown to the levels of 401Ks or a modest fraction of today’s 401K $6.2 trillion in assets (source: 401KSpecialistmag.com, March 20, 2020). Those individuals most seriously impacted by COVID-19 would be able to access money for health and preventive care.
Already part of the $2 trillion relief fund passed by the government, HSAs have been cleared to cover COVID-19 testing and over-the-counter medications during the pandemic.
Getting more attention now for future relief packages is the Personalized Care ACT (PCA) sponsored by Senators Cruz & Braun, which is focused on eliminating the primary shackles holding down HSAs. If passed, the PCA essentially would:
Extend HSAs to millions of Americans by eliminating the high deductible health care plan requirement so any health insurance coverage makes you eligible to open an HSA.
Triple the HSA dollar contribution limits.
Allow HSAs to pay for healthcare premiums.
Allow HSAs to pay for direct Primary Care.
Does this Matter To Financial Institutions?
Long before we were all faced with the uncertainty forced upon us by COVID-19, we surveyed 5,500 banks and credit unions to gain an understanding of whether or not HSAs are important to their business. What we heard even then was a resounding “Yes.” Yet, our survey also revealed that in general, financial institutions are not prepared to take advantage of the pending explosion in HSA accounts, especially in the post-pandemic era.
Here are some highlights from the survey:
50 percent of financial institutions are interested in HSAs, but lack product and industry knowledge to integrate them within their current lines of business.
Institutions need to break down the silos among Retail, Commercial, and Wealth Management. Is it a DDA account, Wealth Management or Commercial product/service?
More than 50 percent of financial institutions that responded currently offer an HSA. Mid-size to small banks see it as a competitive advantage in local markets for commercial and small business accounts. What do they like best about the product? The low cost, sticky deposits!
91 percent have no strategy for non-funders. Institutions are struggling with resources, and with knowing how and when to communicate with and engage account holders to take “ownership” of their HSAs.
66 percent of Customer Service Reps not adequately trained. This is a symptom of lack of education and resources constraints, but ultimately, it inhibits adoption.
These are just some of the key insights shared from our recent survey. To receive a complimentary copy of the complete survey results, click here. (Link here to landing page)
The Future Looks Bright
Even with a number of impediments – lack of education, lack of employer contributions, and lack of legislative support to broaden the market – HSA assets continue to grow at a double digit compound annual growth rate (CAGR).
Their time will come. Where 401Ks may have been oversold in replacing the defined pension plan, HSAs, with their triple tax benefit and retirement safety net, are being under sold.
Like the preamble of our Constitution – We the People – everyone should have the same opportunity…in this case, to invest in a Health Savings Account.
Harland Clarke is a leading provider of customer engagement solutions that help connect businesses and people how, when, and where it matters. The company offers payment tools such as checks and cards; and marketing services such as deposit and loan acquisition programs, digital marketing, and promotional products for businesses. Learn more at harlandclarke.com.