Here’s why you should max out your health savings account

Many employees have a health savings account, which offers tax incentives for saving for medical expenses. However, experts say most still don’t get long-term HSA benefits.

Two-thirds of companies offer investment options for HSA contributions, up 60% from a year ago, according to a survey released in November by the Plan Sponsor Council of America, which polled more than 500 employers during the summer of 2024.

But only 18% of participants invest their HSA balance, a slight decline from the previous year, according to the survey.

That could be a “huge mistake” because HSAs are “the only tax-exempt triple account in America,” said certified financial planner Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta.

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Health savings accounts are popular among advisors, who encourage clients to invest the funds long-term rather than spending them on annual medical expenses. But you need a qualifying high-deductible health plan to contribute.

According to the Plan Sponsor Council of America survey, approximately 66% of employees chose an HSA-eligible health plan.

However, the best health insurance plan depends on your family’s expected medical expenses for the coming year, experts say. Typically, high-deductible plans have lower premiums but higher upfront costs.

HSAs benefit from three tax advantages. There is an upfront deduction on contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

“It’s a way to address the inflationary cost of health care,” said Jenkin, who is also a member of CNBC’s Financial Advisory Council. “If you invest it wisely, it can be like a healthcare 401(k).”

A 65-year-old retiring today can expect to spend an average of $165,000 on health and medical costs through retirement, an increase of nearly 5% from 2023, according to a Fidelity report released in August.

This estimate does not include the cost of long-term care, which can be significantly higher depending on need.

There are several reasons why most employees don’t invest their HSA balances, according to Hattie Greenan, director of research and communications for the Plan Sponsor Council of America.

“I think there’s a lot of confusion about HSAs and [flexible spending accounts]”, including how they work and how they are different,” she said.

Although both accounts offer tax advantages, your FSA balance generally must be spent annually, while HSA funds can accumulate over several years. Plus, your HSA is portable, meaning you can take the balance when you change jobs.

However, many employees can’t afford to cover medical costs each year as their HSA balance increases, Greenan said. “Ultimately, most participants still use this HSA for their everyday healthcare expenses.”