A January 26th New York Times article (“Prognosis is Mixed for Health Savings“) gives a brief summary of the results of the Health Savings Account (HSA) legislation enacted in 2003. The HSA allows individuals to contribute to a health care savings account using pre-tax dollars; a mechanism for savings is similar to a 401(k). In order to qualify for the HSA, however, individuals must have a high-deductible insurance plan provided either by the individual or through one’s employer.The NYT article states that only about two million people have signed up for HSAs, but only half of those enrolled have contributed any money towards their account. This is certainly a puzzling finding. In essence, it seems that these individuals are missing out on an opportunity to lower their taxes and acting irrationally. Below are a few of my explanations which may possibly explain this phenomenon:
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Liquidity Constraints. Those who save little, may not be able finance the contribution to the HSA. Since financial institutions typically won’t give low-income borrowers a loan simply to contribute to the HSA, zero contributions will be the rational choice.
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Adverse Selection. Who are the people who enroll in the HSA? One would guess these would be mostly a) wealthier and b) healthier individuals for whom a large payment below the deductible limit is either a) affordable or b) unlikely. On the other hand, high deductible plans are generally the least expensive. Poorer individuals may also decide to open an HSA because of the low cost of the insurance plan, but may not have the financial resources to contribute to their tax-free account.
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Savings Substitutes. Individuals who save have a variety of options: stocks, bonds, savings accounts, etc. Those who wish to save with pre-tax dollars, also have a variety of options. If an employee has a 401(k) at work, they may elect to do all of their saving through that mechanism rather than the HSA. Since both offer pre-tax savings, as long as the individual does not wish to contribute more than the allowable annual upper limit of the 401(k), not contributing the HSA is rational.
- No tax savings. Using pre-tax dollars to save for health insurance is not a benefit for the 32.4% of Americans who do not owe any income tax at the end of the year (see January 26 post).
- Unfamiliarity. Another plausible explanation is that citizens are simply not familiar enough with the intricacies of HSAs. If this is the case, one would expect that percent of people with HSAs who contribute to their account will rise over time as individuals gather more knowledge.