Before the COVID-19 pandemic, the U.S. economic environment had been experiencing steady stock market growth, low unemployment and robust consumer spending for the better part of a decade. Saving toward future needs during times of economic growth is a good financial strategy. Like 401(k)s, which allow people to use pretax dollars to save for retirement, Health Savings Accounts (HSAs) are a powerful way to save toward future medical expenses. Our advice to HSA owners during those years was to leverage their triple tax advantage and use the account to save for medical expenses in retirement, rather than spending HSA funds on current medical costs.
Today, U.S. citizens face new economic challenges as unemployment rates explode and many people are losing both paychecks and health insurance. In this environment, having an HSA can provide a cushion of money to spend on health care needs. The CARES Act of March 2020 acknowledged this need by restoring certain over-the-counter (OTC) drugs and items to qualified medical expense status. The change is effective for expenses incurred on or after January 1, 2020, and includes OTC medications such as pain relievers; cough, cold and flu remedies; and allergy medication as well as sunscreen (SPF 15 and higher), feminine care products and other items.
The impact of the current crisis is likely to shift how individuals use their HSA funds. As we looked at HSA usage patterns last year, approximately 5% of the population were pure savers, 65% were pure spenders (they spent essentially the same amount they contributed), and 30% were optimizers who saved when they could and spent when they had to. Under current conditions, we would expect the distribution to change, with a percentage of optimizers shifting toward becoming spenders, and possibly a reduction in the number of pure savers.
Most employers are aware that employees can use an HSA to meet their needs as circumstances change with new life events and economic developments. Wise employers know that the support offered by their HSA account provider is critical to making sure employees understand how to optimize their account use. In today's dynamic environment, it is especially important to have an HSA provider who delivers enrollment, account management and support seamlessly to all employees — no matter how they utilize the HSA. Seamless delivery requires key tools and features to meet the needs of spenders, optimizers and savers:
Spenders require tools that help them spend efficiently and that give them rapid access to funds:
Optimizers want information to help them balance their saving and spending needs:
Savers need support to maximize contributions and invest effectively:
Whatever the preferred saving and spending pattern, HSAs offer a flexible financial instrument for optimizing health and wealth opportunities in any economic environment. For individuals who've lost employment and insurance coverage, an existing HSA offers a critical source of funds to help cover current medical expenses. For people whose employment and insurance situations remain stable, HSAs are still one of the best ways to save for current or future medical expenses using tax-advantaged dollars.
