Most employees don’t leverage this ‘triple-tax-free’ account, advisor says. Here’s how to use it

Many employees have a health savings account, which offers tax incentives to save for medical expenses. However, most are still missing out on long-term HSA benefits, experts say.

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

But only 18% of participants invest their HSA balance, down slightly from the previous year, the survey found.

That could be a “huge mistake” because HSAs are “the only triple-tax-free 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 the funds on yearly medical expenses. But you need an eligible high-deductible health plan to make contributions.

Some 66% of employees picked an HSA-qualifying health plan when given the choice, according to the Plan Sponsor Council of America survey.

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

HSAs have three tax benefits. There’s an upfront deduction on contributions, tax-free growth and tax-free withdrawals for qualified medical expenses.

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

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

That estimate doesn’t include the cost of long-term care, which can be significantly higher, depending on needs.

There are a couple of reasons why most employees aren’t investing 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’re different,” she said.

While both accounts offer tax benefits, your FSA balance typically must be spent yearly, whereas HSA funds can accumulate for multiple years. Plus, your HSA is portable, meaning you can take the balance when changing jobs. 

However, many employees can’t afford to cover medical costs yearly while their HSA balance grows, Greenan said. “Ultimately, most participants still are using that HSA for current health-care expenses.”