Morningstar’s First HSA Study — A Good Development for the Industry, But More Left to Say
HSAs Sit at the Intersection of Health Care and Financial Services — Consumers Benefit From Greater Discussion and Transparency

Morningstar recently released the first of its kind research on the Health Savings Account (“HSA”) market, comparing fees, investment menus and account interest rates between the largest HSA providers. This is an important step as HSAs may one day play a contributing role in the overall economy. The health care industry is already the largest segment of the economy; HSAs could encourage consumer choice, a necessary ingredient to improving market efficiency.
Similarly, financial advisors are beginning to recognize HSAs as an essential planning asset. The investment features, tax attributes and withdrawal flexibility are compelling reasons to include in a client’s portfolio. Given the comparative tax advantages with traditional retirement savings accounts, many expect HSAs to become the “401(k) for health expenses.”
Morningstar’s analysis and brand awareness represents a favorable development in the evolution of HSAs
However, Morningstar’s report could have gone further. For instance, the authors stopped short of explaining the HSA business model, nor did they include a comparison with retail banking industry products, such as checking or savings. Both may have benefited the discussion; HSA usage more closely resembles checking accounts than the mutual fund investments highlighted in the report.
Nevertheless, Morningstar’s analysis and brand awareness represents a favorable development in the evolution of HSAs, much the way their attention on mutual funds ushered in a new age of investment fee transparency.
To supplement this current report (see disclosure below) I will address a handful of these other areas, and conclude with some broader recommendations.
1. Employee Benefits — A B2B sale
HSAs are primarily a business-to-business (B2B) product, as HSA providers are chosen by employers on behalf of their employees. Not surprisingly, most businesses select suppliers for reasons suited to the business buyer. Consumer-facing (and friendly) product features benefitting the end user may not always be top priorities with limited development budgets.
Further, most of the HSA providers included in Morningstar’s report grew their business selling Flexible Spending Account (FSA) programs. FSAs predate HSAs (created by Congress in 2003) and require different user behavior. From a consumer’s perspective FSAs are like HSAs the way credit cards are like ATM debit cards — the former solely enable spending while the latter enable both spending and saving. This historical spend orientation by the HSA-FSA user base promotes a different business culture than one delivering investment products like mutual funds.
Finally, both FSAs and HSAs require significant development, maintenance and compliance costs, while offering few “cross-sell” opportunities. Unlike the retail banking industry, for instance, which routinely markets home mortgages, car loans and IRAs, among a variety of financial products, HSA providers, like other employer benefits providers, have just a handful of products to offer the business purchaser.
2. Consumer Health Accounts — A History of Small Balances
FSAs, the workhorse of tax-free health spending dollars, feature small contribution limits — $2,600 for 2017. Further, FSA funds must be spent or forfeited at year-end[i] and pay no interest during the year[ii]. FSAs were not designed to promote consumer savings beyond the very near term.
Health Savings Accounts, on the other hand, are real financial accounts where the balances are owned by the user and roll forward every year. While HSA contribution limits are larger than FSAs, average balances are still relatively small according to studies, usually less than $2,000, and much smaller than average 401(k) balances.
This relative size is important when comparing fee structures. The HSA providers’ ongoing costs must be distributed over a relatively small dollar account base, distorting fees as a percentage of assets. Further, whereas the providers of basic checking accounts will seek to recoup costs through a wide variety of fees, HSA providers must cover their costs through a relatively narrow set of charges. Notably, the expenses detailed by the Morningstar report are often paid for by the employer on behalf of their employees.
3. Choice of HSA Provider — Ultimately a Consumer Decision
Similar to an Individual Retirement Arrangement, or IRA, HSA owners can choose their account provider. They can transfer their balances to another HSA provider at any point and for any reason[iii]. This flexibility in consumer choice is written into the regulations and governed by the IRS — see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
As HSA balances grow providers will begin to compete for the higher dollar investment account, and perhaps even include more holistic portfolio management (see next). Similarly, HSA investors will shop for the best combination of service and cost, aided by research of the kind Morningstar provided. Just as in other areas of the financial services industry, increasing operational scale means lower per unit costs, savings ultimately passed on to customers in a competitive open market.
4. Portfolio Asset Management
While family HSA contribution limits are roughly 1/3 of 401(k)’s ($6,750 vs. $18,000 in 2017), the HSA’s tax advantages make them an important consideration in retirement portfolio management. HSA funds can be withdrawn for non-qualified expenses penalty-free once the account owner reaches 65 years of age, meaning the account essentially becomes an IRA while retaining tax-free treatment for health expense withdrawals.
Despite the many tax advantages over its retirement savings peers, HSAs are not yet part of mainstream wealth management. This will change, as more HSA-qualified health insurance plans are adopted and HSA balances grow. Financial advisors and investment-savvy individuals will increasingly incorporate HSA investments into their wealth and tax-planning strategies.
Recommendations
With few policy changes available to address rising health care costs, we should expect the health care industry to continue to expand. This growth will be represented through cost increases greater than overall inflation, costs which will in turn be passed on to government, corporate and individual payers through increased premiums, co-pays, deductibles and, in the government arena, ultimately higher taxes and program cost share (i.e. Medicare premiums, deductibles, and Medicare means testing).
Managing the impact of rising health care costs will similarly grow in importance. Health Savings Accounts provide taxpayers an ability to lessen the impact of these cost increases (direct and indirect), while providing an opportunity for more holistic wealth management.
A few recommendations for this new environment:
1. Tax Planning
The role of taxes in creating and preserving wealth cannot be overstated. The tax code treats income and short-term gains very differently than long-term gains and qualified dividends. Even still, the best taxpayer option is an untaxed one. Health Savings Accounts are one of the few (if only) such offerings available.
2. Investment Management
As highlighted by the Morningstar report HSA funds can be invested in the market. Savers should find the optimal balance of short-term savings and long-term growth for their specific situation; an analysis financial advisors are increasingly prepared to conduct. We at HSA Coach have a number of calculators and general recommendations in our app, available for free in the AppStore and GooglePlay.
3. Health is (Future) Wealth
Numerous studies on retirement report overall health and ability to continue pre-retirement activities as retirees’ number one concern. While the value of health in our older years is more visible as we near that stage, we tend to under-value it until then. Nutrition, exercise, sleep and other lifestyle factors represent a cumulative approach to investing in our future selves. The mechanical aspects of portfolio management and tax planning are undoubtedly important, but ultimately cannot compensate for a lack of attention elsewhere. Health is wealth in a much more holistic state of being.
Disclosure
I worked closely with one of the Morningstar research report authors, Jake Spiegel, while we were both employed by HelloWallet, a financial wellness startup. Together we completed a study of HSA usage from account data generously provided to us by a top ten HSA provider. Morningstar purchased HelloWallet less than a year later.
Endnotes:
[i] Plan design feature allows certain plans to rollover $500 into following benefit year period.
[ii] An FSA is essentially an employer-sponsored line of credit. In exchange for having the full amount available to the employee at the start of the benefit year, any unused funds withheld from employee payroll may be forfeited at year-end.
[iii] Trustee-to-trustee balance transfers are unlimited. Transfers where the account owner receives the funds from an HSA custodian directly and subsequently deposits to another HSA custodian, which the IRS refers to as a “rollover,” are limited to once per one-year period. Further, these funds must be deposited within 60 days of receipt.
Thanks for reading. I’ve written on Money, Investing, Healthcare, Nutrition, Behavior, and other (mostly) related topics. More on Medium, LinkedIn, and Quora.
About Us:

After the HelloWallet sale to Morningstar we built a digital platform, HSA Coach, that combines this acquired book-knowledge into user-friendly financial guidance. We are particularly focused on helping you manage your health paperwork (expenses, forms, results, etc.) while incorporating Health Savings Accounts into the broader retirement savings plan, with some personalized calculators to allocate between your HSA and 401(k). More coming. Available for free in the App Store and Google Play.
As always, comments and reading suggestions on this and other topics welcome
