FEAR NOT: There’s Still Time for TPAs to Enter the Thriving HSA Market
Health Savings Accounts (HSAs) have been around for 17 years and continue to exhibit long-term adoption growth. However, despite their popularity and ease of administration, many third-party administrators (TPAs) have been cautious about adding this account to their services menu. Even so, it’s not too late.
Here’s what TPAs can do to capitalize on this expanding opportunity and enter this consistently growing market.
Health Savings Accounts – A History
Consumer directed healthcare can trace its history back to the late 1970s with the creation of medical Flexible Spending Accounts (FSAs). The idea behind the FSA was that people could open a tax-advantaged account and have more control over their personal healthcare spending. A participant would set aside money before taxes to reduce their taxable income and then use those set aside funds to pay for IRS-approved healthcare expenses for themselves and their dependents.
Over the next two decades, consumer directed healthcare became more popular and as it did, additional variations on the concept sprung up. These included MERPs – Medical Expense Reimbursement Plans, the precursor to the modern Health Reimbursement Arrangement (HRA) – and other FSA types such as the limited purpose FSA which can only be used for dental and vision.
Then in December 2003, Congress approved the Health Savings Account (HSA) as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Like the FSA, HSAs empower account holders to reduce their personal tax liability while setting aside funds for qualified healthcare expenses for themselves and their family. Since 2004, when the first HSAs were opened, account acceptance has skyrocketed; it is now the second most popular tax-advantaged healthcare account next to FSAs (32.6 million in 2020) and is projected to continue growing steadily into the future.
HSA Requirements – HDHP Enrollment
The primary requirement for opening and contributing to an HSA is simultaneous enrollment in a qualified high deductible health plan (HDHP). An HSA-qualified HDHP has minimum deductible and maximum out-of-pocket thresholds set by the IRS. The idea is that HDHP premiums are lower, so participants pay less on a month-to-month basis; the low premiums are offset by higher deductibles. HSA owners can capitalize on premium savings by putting the money saved into an account for eligible healthcare expenses. They get to choose when and how to spend their healthcare dollars.
As employers look to save money on insurance programs and offer additional financial incentives such as an HSA, the number of HDHPs offered has increased dramatically over the past decade. In 2010, 15 percent of private employers offered an HSA-qualified HDHP. In 2020, 52 percent of large firms (200 or more workers) offered an HSA-qualified HDHP, while 19 percent of small firms (199 or fewer workers) offered one. However, only 24 percent of covered workers were enrolled in an HSA-qualified HDHP in 2020. Workers in larger companies enrolled at a higher rate than those at smaller companies.
Clearly, the HSA market is vastly underutilized by eligible workers. A sizeable portion of eligible individuals still do not have an HSA, particularly those employed in smaller firms. As a result, HSA market growth continues to be strong and is likely to remain so for the foreseeable future.
HSA Growth from 2011-2020
In the nearly two decades since HSAs emerged, the industry has watched the accounts boom in acceptance and enrollment. Over the past 10 years especially, HSA growth has exploded. Since 2011, the number of HSAs has grown from 6.8 million accounts to 30.2 million in 2020. That’s a growth rate of over 300 percent in a single decade and a near-doubling in just five years (from 16.7 million in 2015). By 2023, the HSA market is projected to exceed 36 million accounts (20 percent growth from 2020).
Should the IRS choose to untether the HSA account from its HDHP enrollment requirement – an idea that is gaining traction within the industry – growth could dwarf current projections and create an even greater market bounty.
Why are HSAs so popular? Even though you must be enrolled in an HDHP to open and contribute to an HSA, the account offers greater flexibility than health FSAs or HRAs.
- First, there is the triple tax advantage HSAs provide, including tax-free contributions, tax-free withdrawals for qualified expenses, and tax-free growth, including interest and investment gains.
- Second, account ownership (or portability) offers another distinct advantage. A person that opens an HSA owns the account for life. Regardless of the individual’s employment status or health coverage, the HSA is theirs to keep and use.
- Third, an HSA can function as a supplementary retirement account, similar to a 401(k). After age 65, an HSA owner can use their account for any expense without penalty – not just approved healthcare expenses (withdrawals are taxed for 65+ year olds only if used for non-qualified expenses).
Another advantage HSAs provide is the ability to delay distributions. Account owners can file for an expense reimbursement (distribution) at any time – even years later – so long as the account was opened prior to incurring the eligible expense. This can be very helpful to those wanting to build their HSA account balance, as the funds are not tied to any specific plan year.
Yet, despite the continuous account growth, projected market expansion, and wide popularity of the accounts, many TPAs have not yet offered HSA account administration.
Reasons TPAs Have Historically Not Offered HSAs
There are several primary reasons why some TPAs have been reluctant to enter the HSA market.
Competing with banks. Many financial institutions across the country offer HSAs to their customers free-of-charge. Whether it’s a community bank, credit union, or large regional or national bank, this can be daunting. After all, if the banks are offering the accounts for free, why would an account holder or employer pay for professional TPA services?
How will I charge? An overlapping issue with that of bank competition is how to charge employer groups for your services. “Will I price myself out of the market?” “Who can give me professional advice?”How will I charge? An overlapping issue with that of bank competition is how to charge employer groups for your services. “Will I price myself out of the market?” “Who can give me professional advice?”
Jumping into a new market. A TPA who already understands and offers health and dependent care FSAs, HRAs, COBRA, or Transit/Commuter plans may feel intimidated at having to learn the ins-and-outs of a new employer benefit. Questions such as “Is the entry cost worth it?,” “How much work does my team have to put in?,” and “How long until this is profitable?” can be vexing.
Unique TPA Advantages
Believe it or not, TPAs have several advantages over banks. Third party administrators are skilled professional administrators with the knowledge and experience to offer employer groups a higher level of service that most banks cannot provide.
Knowledge. While half of employers offer an HSA, more than two-thirds (69%) of employees do not understand their benefits. As a trusted source of benefits expertise, TPAs have a prime opportunity to step in and educate, growing their value to employers, solidifying their reputation with brokers, and increasing account adoption all at the same time.
A Better User Experience. With the right platform, a TPA can provide a top-notch user experience to their employer clients and participants. Functionality such as online enrollment, online contributions, electronic claims storage, mobile app, and options to self-certify (or administer yourself), can take the HSA experience to the next level. Your solution may also allow you to control MCC and IIAS restrictions on the associated debit card, giving your account owners a guardrail to help protect them in case of a tax audit.
Investing Options. Another downside to the free HSA offered by banks is that many banks do not offer an investment option. With tax-free investment gains, investing is a key part of the growth strategy for many HSA owners. An HSA solution should feature investing services, including educational materials, pre-selected portfolios, and more.
Inherent Business Acumen. Think about how you currently charge your employer groups for FSAs, HRAs, and other accounts. You can use the same pricing model for HSAs. A per employee/per month (PEPM) pricing model is common. For “at-large” accounts that are no longer associated with a specific employer, you could charge the account holder a flat monthly fee for administration services.
HSAs have a lengthy history and have proven themselves to be an important commodity in employer-sponsored
healthcare benefits. As more employers add qualified HDHP plans, HSAs have become invaluable as a healthcare
spending and savings vehicle for participants. Banks and other financial institutions have shrewdly entered the market
by offering free accounts, using their financial clout to achieve a perceived advantage over TPAs. The truth is, however,
they offer an account and not much more.
While many third-party administrators have avoided adding HSA administration to their services menu, they should
seriously reconsider. HSA administration adds another layer of financial income for the TPA while allowing the firm to
offer comprehensive employee benefits services without adding a significant amount of work. Furthermore, a TPA is
uniquely positioned to offer the full breadth of HSA advantages to their clients – a flexible tax-advantaged account can
be used for a wide range of services for healthcare or retirement; a vehicle for financial growth and security; oversight
on eligible expenses; and a user-experience that leaves them satisfied with their decision to enroll and use the account.
When it comes to HSAs, it’s time for TPAs to act. TPAs need to seize the advantages they inherently possess and
jump into this thriving market. In fact, at this point in the market’s growth curve, any further hesitation will result in
significant missed opportunity and, ultimately, lower revenue potential.
About the Company:
Founded in 1984, DataPath, Inc. is an administrative solutions provider for tax-advantaged healthcare benefit plans including FSAs, HRAs, HSAs, COBRA, and other employer-sponsored benefits. The company also created the award-winning employee education and engagement program, The Adventures of Captain Contributor. Learn more at dpath.com.