Are Health Savings Accounts Recession-Proof?
- Lauren Hargrave
- 6 min read
Is the American economy currently in recession? Is it approaching one? How will we know? While recessions are a normal part of economic cycles, it can make us jittery to hear the economy is slowing down. The U.S. economy grew 2.6% in the third quarter of 2022, and the federal government has yet to announce that it’s officially in recession. However, recession or not, people are still experiencing financial hardship or stress. In fact, a recent Pew Research poll found that 49% of Amercans view the economy as “poor” and 47% believe it will be worse in a year. In addition, 80% of HR leaders reported that offering employees competitive financial benefits was more important than a year ago in order to help ease economic stress. How Americans feel about the economy, regardless of its official designation, can have far-reaching effects.
While a recession has not yet been officially announced, we will experience one at some point in the future. But it’s nothing to fear, it’s just something to plan for. And a Health Savings Account (HSA) can help both employees and employers do that.
A brief overview
The definition of “economic recession” can be hotly contested and political, but The Economist defines it as, “a period of significant decline in economic activity.” In America, the responsibility for announcing economic changes, including recessions, falls on the National Bureau of Economic Research (NBER), a private, nonprofit research center on which the federal government depends. Typically, there is roughly a 6-month lag time (sometimes more) between when the recession starts and when it’s announced. For example, the Great Recession was officially announced in December 2008, a full year after it had begun. It ended in June of 2009.
So the time to plan for a recession is before the NBER officially announces it. One way to do that is to open and contribute to an HSA. Building up a medical safety net in the form of an HSA, and utilizing all of the tools that HSA provides, can help you recession-proof your financial health.
What is an HSA?
An HSA is a savings account into which you deposit pre-tax money to pay for qualified medical expenses. In order to open and contribute to an HSA you must be currently enrolled in a High Deductible Health Plan (HDHP) and that must be your only health insurance coverage. Your HSA contributions roll over from year-to-year allowing you to build your savings to use in the future when you really need them, or even save for retirement.
Should you invest or save?
One of the HSA features that is under-utilized, but can help recession-proof your overall financial picture, is your ability to invest your HSA contributions. Not all HSA administrators allow you to invest your HSA money, but if you have an account with Lively you can take advantage of several HSA investment options and can use your contributions to buy stocks, bonds and other assets. By doing this, you can grow your savings at the rate of the market.
It might seem counterintuitive to invest money in the market to plan for a slowdown, but it’s important to remember the economy is cyclical. Recessions are normal occurrences and eventually end. Consequently, the market can experience wide swings in growth on a year-to-year basis, even when the economy is “good”, but over the long term it has an average annual growth of 8% (when you take inflation into account). So you want to approach investing with as long of a time horizon as possible.
Recessions can also offer opportunities to buy assets at a greater value than you might be able to when the market is high. So you don’t want to stop contributing to your HSA or investing your savings unless you have immediate needs for that cash. By purchasing investments when the market experiences a dip, you can see a greater growth in your overall portfolio value (i.e. savings) once the market takes a turn for the better.
Pay as you go funding
Since contributing to an HSA requires you to have an active HDHP, it shifts the way you spend your health care dollars to a more “pay as you go” model. Traditional health insurance plans tend to have higher premiums and cover a wider range of care upfront in exchange for those higher monthly payments.
HDHPs tend to have the lowest monthly premiums and cover a wide range of preventative care prior to the deductible being met. Recent budget legislation even allows for insulin shots to be considered preventative care and covered prior to meeting the deductible. But medical treatments that aren’t considered preventative care require out-of-pocket payment.
This structure allows plan participants to use the lower monthly premiums to save money in their HSAs for the medical care they want and need instead of paying higher monthly payments for care they don’t. As a bonus, they’ll save up to 37% on that medical care, depending on their tax bracket, since contributions are made tax-free.
Another recession-friendly feature of HSAs is the ability of participants to change the amount they’re contributing as needed. That means you can lower contributions or pause them altogether if you have an immediate need for cash one month, then restart whenever you want. You can also make contributions up to the annual limit when you have an expense arise or when you receive a lump sum of money like a bonus, tax refund, or inheritance.
Consumers look for lower costs
In an economic downturn, consumers naturally begin to look for lower prices. The HDHP and HSA model pairs perfectly with this mentality. Not only are HDHPs usually the more affordable health insurance options, they allow participants greater choice in how their healthcare dollars are spent.
Since they will be using their health savings account to pay for most of their medical expenses, they’ll be more incentivized to look for value in terms of providers. The same procedures will have different price tags at different hospitals and with different doctors, so the HDHP with an HSA model empowers consumers to shop around. HDHPs typically have PPO-style networks so plan participants have a wide range of options to choose from.
How does it affect employers?
As the economy slows down, so does revenue for many employers. This often requires them to cut costs. Unfortunately, the cost of health insurance premiums always seems to rise and is expected to do so again in 2023 to the tune of 7-8%. One way to help insulate your budget from rising costs and falling revenue is to not only offer employees an HDHP, which comes with lower monthly premiums, but an HSA as well to encourage employees to choose this option.
HSAs can also help alleviate the financial stress many employees feel. A recent study by FINRA showed that while COVID exacerbated feelings of financial stress many people were feeling, this phenomenon wasn’t new. In fact, in a 2018 study, they found that 53% of respondents were experiencing anxiety and stress around their finances. This affects employers because people who feel financial stress are less productive overall and spend 25% of their workday, on average, dealing with their issues. At a time when employers must do more with less (either smaller budgets, a reduced staff, or both), they need their employees firing on all cylinders. HSAs can help them do that.
HSAs help address financial stress by giving employees a way to save tax-free money to pay for medical care and even retirement. The flexible nature of HSA contributions give employees more control over how and when they contribute and the lower monthly premiums give employees more room in their monthly budgets.
Get started with Lively today
Whether you’re an employee or an employer, HSAs can help recession-proof your financial picture and alleviate financial stress. We offer two different investment HSAs to help grow your contributions at the rate of the market as well as a full customer service suite for both account holders and employers. To learn more about one of the most popular HSAs in the market, reach out today.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.