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Here's Why So Few People Use the Best Tax Break on the Books

By Dan Caplinger – Aug 21, 2020 at 7:01AM

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There are a couple of big obstacles to using these special investment accounts.

Everybody likes saving money on their taxes. That makes it somewhat surprising that one of the best and biggest tax breaks currently allowed under the Internal Revenue Code isn't much more popular than it is.

That tax break comes from health savings accounts. Unfortunately, there are factors that keep millions of taxpayers from ever taking advantage of them. As useful as health savings accounts can be, they come with some challenges that not everyone can overcome. Below, we'll look at the biggest reasons why HSAs don't get used.

Many employers don't offer HSA-eligible high-deductible health insurance

Health savings accounts allow eligible people to contribute up to certain dollar limits each year. Those contributions are tax deductible, and any earnings are tax-free on withdrawal if you use the money for qualifying healthcare expenses. However, to be eligible, you need to have a health insurance plan that has a certain minimum deductible before coverage kicks in.

Computer keyboard with blue tax button in place of the return key.

Image source: Getty Images.

High-deductible health plans have gotten more common over the years, but they're still the exception rather than the rule. According to the latest survey from the Kaiser Family Foundation, just 26% of employers offer an HSA-eligible health plan as part of their coverage. That's up from 10% a decade ago, but it hasn't become more common since the high-water mark for the HSA back in 2012.

Big companies are more likely to go to the trouble of setting up HSA-eligible health plans, but even there, only half of businesses with 200 or more employees do so.

Employer contributions to HSAs tend to be small

Employers like HSAs partly because the accompanying high-deductible health plans tend to have much lower premiums than more comprehensive insurance options. With the typical employer paying a majority of premium costs, the savings from less expensive health insurance leaves more money in companies' pockets.

Some companies share those savings with employees by making contributions toward their workers' HSAs. However, those contributions tend to be small. Kaiser's numbers showed that in 2019, the average employer contributed just $1,062 toward each employee's HSA for family coverage and just $572 for single coverage. That's not nearly enough to cover the $2,800 minimum deductible amount for family coverage in 2020 or the $1,400 deductible for self-only insurance.

Seeing the potential for financial problems associated with paying the rest of that deductible out of pocket, many workers decide to pick more comprehensive health insurance options over HSA-eligible plans.

People can't afford out-of-pocket maximums

Finally, HSA-eligible health plans tend to have extremely high out-of-pocket maximums. The laws governing HSAs require the maximum amounts you have to pay out of pocket to be no more than $6,900 for self-only coverage or $13,800 for family coverage.

With more comprehensive coverage, many people never come close to hitting out-of-pocket maximums. However, because high-deductible health plans are designed to put more of the cost burden on the worker, you're more likely to have to cover the full maximum amount. Although monthly premiums might be less expensive, they still won't be cheap enough to cover those costly out-of-pocket expenses.

What it'd take for HSAs to be more common

For HSA adoption to rise, more employers will need to boost the amounts they put into their workers' health savings accounts. Only by sharing more of the cost-savings will employers be able to entice employees to make the leap. Even then, for those employees who can't afford to take the risk, more comprehensive insurance will still be popular -- even if an HSA would leave them better off.

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