HomeFinanceHSA investments decline due to unfavorable market conditions, Increasing rates

HSA investments decline due to unfavorable market conditions, Increasing rates

Although health savings accounts (HSAs) experienced significant growth in the past years, market challenges resulted in a decrease in the amount of money invested in them in the previous year.

  • For the first time in over ten years, the balances of investments in health savings accounts (HSA) experienced a drop in 2022.
  • It is expected that HSA investments will maintain an upward trend and are anticipated to increase by 75% by the year 2025.
  • Accounts that incorporate investments in HSA are approximately seven times larger than accounts that solely depend on deposits.

Recent data released by Devenir, an HSA investment provider, reveals that investments in HSA accounts witnessed a decline of 2% in 2022, with the balance decreasing to $33.8 billion, ending a decade-long growth trend. In 2022, investments constituted 32% of all HSA account balances.

“More HSAs than ever are investing, but the rapid growth seen over the last few years has slowed in the face of significant market headwinds and rising rates in 2022,” the report said.

The year 2022 witnessed a reduction in investments held in HSAs due to challenging market conditions. Increasing interest rates, which have been raised by the Federal Reserve nine times to reach an upper limit of 5% since March of the previous year, played a significant role. The decline was also influenced by stock market instability, as the S&P 500 index, the leading benchmark, experienced a drop of 19.4% in 2022.

Despite the challenging market conditions, 2.6 million HSA account holders continued to utilize their accounts for investments. In 2022, approximately 7.2% of all HSA accounts held some investment funds, an increase from 6.9% the previous year and 3.7% in 2018.

Devenir expects the decline in investment balances witnessed last year to be temporary, projecting a continued increase in HSA investment balances in the near future. According to their forecast, HSA accounts are expected to hold $59 billion in investments by 2025, marking a 75% increase from 2022. Additionally, the number of HSA accounts is predicted to continue to rise, nearing 43 million during that period.

Similar to a 401(k), an HSA is a benefit offered by employers that provides tax incentives to encourage savings. However, unlike a 401(k), which is tailored to provide retirement savings, an HSA offers tax-free savings to employees to cover medical expenses that can be withdrawn at any time.

Similar to a 401(k), HSA account holders have the option to allocate a portion of their account to investments, and the percentage of investment assets held in these accounts has significantly increased in recent years. In 2021, 35% of all HSA balances were invested, a substantial rise from 14% in 2015.

HSAs that include investments are significantly larger in size

HSAs that include investments are considerably larger than those that rely solely on tax-free deposits for growth. On average, accounts that hold investments have a total balance of $16,397, which is 6.7 times higher than accounts without any investments.

In 2022, HSA account balances experienced a 9% growth, amounting to $104 billion. The increase in balances was largely attributed to a rise in cash deposits. Additionally, more employees opted to open an HSA account, as new accounts increased by 6% to reach $33.4 billion.

HSA providers are optimistic about their growth prospects and are projecting a 13% increase in HSA assets in 2023. However, Devenir’s report has raised doubts about their ability to achieve these projections.

“Historically, HSA providers have been fairly accurate with their growth forecasts, demonstrating an impressive understanding of the outlook for their book of business,” According to the report. “However, as a greater share of HSA assets is held in investments, market movement will make forward-looking projections more difficult.”

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