What Happens When My Hsa Balance Is $0 - T-Tees - Your Answers Await, Life's Questions Unraveled

Several recent surveys highlight open Health Savings Accounts with no balances. Why are balances $0? And should we be concerned?

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One of the striking pieces of information in the Devenir Research 2020 Year-End HSA Market Statistics & Trends Executive Summary (released in March 2021) was that 20% of Health Savings Accounts (roughly 6 million) had a zero balance at the end of 2020. That’s a higher percentage than any range except $1 – $500 (30%) and is half again as high as the percentage of accounts with balances of $5,000 or more (13%).

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Critics of Health Savings Account pick up on figures like this when they criticize the accounts as benefitting only the rich. I hear this line of reasoning frequently during my visits to members of Congress and their legislative aides and committee staffers, particular from Democrats (the party that, coincidentally, created the consumer-driven revolution a quarter-century ago with the introduction of the forerunners of Health Savings Accounts). They favor Health FSAs (I often hear the term the working man’s reimbursement account) to what they consider an account for the healthy, the wealthy, and the wise.

But the percentage of accounts that aren’t funded at a point in time doesn’t provide us with much meaningful information, other than that those owners aren’t taking full advantage of the benefits of Health Savings Account. But accounts with a $0 balance shouldn’t be viewed as the equivalent of the scarlet letter.

Let’s look at some possible reasons behind this figure.

Not Eligible to Contribute

Some people enroll in HSA-qualified coverage even when they’re not eligible to fund a Health Savings Account. Yet their company’s payroll system or its insurer send that employee’s eligibility to the company’s account provider electronically. The provider sets up an account and awaits funding. But the employee realizes that she’s not eligible to contribute. She takes no action to either fund (because she can’t) or cancel (because she doesn’t see it as her problem) the account.

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Why would an employee enroll on a plan with a high deductible when she can’t fund a Health Savings Account? Here are several possible explanations:

It’s the only plan that her insurer offers.
Because out-of-pocket limits for HSA-qualified plans are lower than for other plans under federal law, her potential financial responsibility may be less under an HSA-qualified plan.
She’s healthy, and the plan offers the lowest premium. She plans to fund her account only as she incurs expenses.
She’s not eligible immediately, but she will be when her own or her spouse’s general Health FSA plan year ends, at which point she’ll fund her account.
She’s not eligible to contribute, but her husband is. She doesn’t bother to close her unfunded account. Meantime, he’s funding his account.
She used to contribute, but then she switches plans. She spends her balance. But because she remains an active employee, her account provider keeps her Health Savings Account active in case she becomes eligible to contribute again.
She’s a Native American, and she receives her care through Indian Health Services, the only medical option on her reservation. Federal tax law prohibits her from funding a Health Savings Account for three months after receiving non-preventive care through IHS.
She moved her balance to a new account, but she didn’t want to pay the account closure fee. Her old provider keeps the account open, hoping that she’ll fund it again. She doesn’t. Eventually, it’s closed. But that process may take several years.

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In each of these cases, a zero balance doesn’t reflect someone who’s not taking advantage of the benefits of a Health Savings Account.

A Spender

Most account owners naturally build balances over time. In the aggregate in 2020, contributions ($41.7 billion) exceeded distributions ($30.1 billion) by $11.6 billion, or an average of nearly $400 per account. And 2020 was no fluke (although cancelled medical appointments certainly diminished opportunities to spend. The surplus was $9.5 billion in 2019 and $8.0 billion in 2018. It exceeded $4 billion in 2014 and hasn’t fallen below that figure since, increasing in all but one year.

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But some people use the flexibility of contribution rules (owners aren’t bound to a fixed election, so they can increase or decrease their contributions – even through pre-tax payroll – as they wish) to deposit only enough to meet their qualified expenses as they incur them. Others may take a page from my old boss’s Health FSA strategy, paying their qualified expenses with personal funds, saving their receipts, and reimbursing the expenses tax-free just before Christmas.

A wise user of a Health FSA spends the balance by the end of the plan year to avoid forfeiture of unused funds. Similarly, it stands to reason that some portion of Health Savings Account owners – although I’ve never seen an estimate – use their accounts the same way.

The zero balance is a snapshot in time. A Health Savings Account owner, like a Health FSA participant, may have directed $2,750 into their account and spent it all during the plan year. In both cases, these people enjoy tax benefits, even though their end-of-year balances are zero. On average, they save about $750 in federal payroll taxes, as well as federal and state (where applicable, except Health Savings Account contributions for residents of California and New Jersey) income taxes. That’s a substantial benefit that defies the conventional wisdom that a measured balance of $0 in a Health Savings Account is bad.

Employer’s Program Isn’t Optimal

Another possible explanation gets to the heart of the matter. The employer Health Savings Account program may not be effective. Employees may not be aware of the benefits of a Health Savings Account. Perhaps the company doesn’t partner with an account provider, or the partner provides ineffective education. The company may not contribute.

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This is an area in which an account with a zero balance signals a problem. But broad industry surveys can’t capture this micro information.

Action Step

Companies should look at their employees’ Health Savings Account activity periodically to diagnose problems. They can look at contributions through the Cafeteria Plan to gauge the level of engagement and funding.

Employers can’t see activity in employees’ accounts, nor are they entitled to this information. After all, Health Savings Accounts are personal financial assets, not employer-owned accounts (like a Health FSA or Health Reimbursement Arrangement). But companies can ask their Health Savings Account provider to deliver some basic information, for example the number of accounts that have never been funded. It’s then up to the employer, working with its benefits advisor and account provider, to diagnose the source of the problem and craft a solution.

The Bottom Line

The fact that the balance in a financial account at a moment in time is zero doesn’t automatically translate into a problem. But it’s worth looking at those accounts to see whether that snapshot is reflective of the account over time or a momentary blip. If further investigation shows that a Health Savings Account isn’t being used by someone who’s eligible to contribute to and withdraw funds from it, employers would do their employees (and themselves) a service by trying different approaches to build awareness and encourage funding.

I’m director of strategy and compliance at Benefit Strategies, LLC, an administrator of Health Savings Accounts and reimbursement accounts. You can read and subscribe to my Health Savings Account GPS blog here and read my weekly HSA Monday Mythbuster and HSA Wednesday Wisdom columns and occasional Healthcare Update column published on LinkedIn. My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, retirement planning, and Medicare. It’s available in paperback and e-book at Amazon.

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