Avoiding the Negative Effects of Owning an Inactive HSA
by William Stuart | Originally posted on LinkedIn for your Health Savings Academy
Some Health Savings Accounts, like qualified retirement accounts, are left behind when workers move to new companies. These valuable assets deserve regular attention.
Health Savings Accounts are a financial asset, like a savings, retirement, or investment account. These accounts are funded by money that the owner could have spent earlier but instead placed into these accounts for future spending.
Because Health Savings Accounts aren't a physical item that a person stares at every day, they're easy to lose track of. Few people forget about a vehicle, an 80-inch television, or a diamond necklace when they move from one home to another. But they sometimes forget about an old passbook savings account or safe-deposit box containing some stock certificates that they inherited.
It's important to keep track of and manage all financial assets. And Health Savings Accounts are no exception.
Here are three key reasons to pay attention to Health Savings Accounts (and other financial assets):
ONE. Little or No Growth
Most dormant Health Savings Accounts contain cash balances that are growing through interest rates of perhaps 0.10% to 0.15% when the recent history of price inflation, even dismissing the past two years of higher-than-average increases, has been in the 2.5% range. In other words, balances lose spending power of more than 2% annually in normal times.
The general-inflation figure doesn't fully reflect the loss of purchasing power, however. Since the passage of Medicare and Medicaid nearly six decades ago, medical inflation has risen at about twice the rate of the increase in general prices. Thus, the real loss in medical purchasing power is closer to 5% annually when nominal balances grow only through today's ultra-low interest rates. In this environment, a $1,000 balance with 0.10% interest paid and roughly a 5% rate of medical inflation will buy only about $500 worth of qualified goods and services in 15 years.
As with any financial account, a Health Savings Account owner is unlikely to retain purchasing power by relying on earnings from interest alone.
TWO. Inappropriate Investment
Even if balances are invested in mutual funds, stocks, EFTs, bonds, or money-market funds, the portfolio may be inappropriate in an evolving financial world or changes in the owner's situation. For example, a portfolio assembled prior to this year with no Treasury bills may have been appropriate. Today, as interest rates on those bills exceed 5%, they may be a prudent short-term investment. In contrast, as interest rates rise, Treasuries lose their value relative to equities as a source of long-term balance growth.
Many Health Savings Accounts offer a range of investment options of two dozen to three dozen mutual funds. A growing number of these menus include target funds that combine a mix of equity and bond funds and adjust the ratio between the two types of investments over time to balance return on and return of capital as the owner approaches and enters retirement.
But many Health Savings Account investors may not choose these set-it-and-forget-it funds, either due to their lack of understanding or their generally high fees (returns are reduced by the administrative fees for the target fund itself and each fund in the portfolio).
Further, an investment allocation made, say, 10 years ago may not be appropriate given today's market and the fact that the owner is a decade older. Yet when the account isn't actively managed, this is a natural result. The account's portfolio may be overweighted with growth stocks as the owner prepares for retirement or may have balances in a fund that has failed to beat the relevant index in a decade or more. An active account owner can spot these situations and adjust investments appropriately. But accounts that aren't managed (or remembered) may well create lost opportunities for more substantial investment gains.
THREE. Escheatment
Escheatment is the process by which financial institutions turn over funds in inactive accounts to the appropriate state government. States have crafted escheatment processes that the institution must institute after a certain period with no account activity and unsuccessful attempts by the institution to connect with the owner. The asset holder then forwards the money, along with information on the account owner (such as name and last known address) to the state treasurer's office. The state treasurer then attempts to contact the owner using databases at its disposal. In my state - Massachusetts - the state periodically publishes a flier in Sunday newspapers and maintains an online data base to help locate owners.
When Health Savings Account balances are turned over to the state, they're no longer Health Savings Accounts and thus the funds are included in taxable income. But if you've maintained records (or can retrieve some quickly, such as downloading explanations of benefits or annual summaries from your medical insurer's portal), you may be able to pair the distribution with qualified expenses and thus report the distribution as tax-free reimbursement for qualified expenses. Be sure to check with your personal tax counsel.
The Antidote
Most Health Savings Accounts owners are introduced to their accounts through their employer. But unlike a 401(k) plan or a Health FSA, Health Savings Accounts are owned by the individual, not the company. Because they're not tied to the company, employees retain ownership of their accounts and don't have to complete and submit paperwork (employer-sponsored retirement plan) or determine whether they can continue their plan via COBRA (Health FSA). This is no barrier, save for owner ignorance, to managing balances.