The use of Health Savings Accounts (HSAs) is growing rapidly, but users are not taking full advantage of all that the accounts have to offer. Those are some of the key findings in the Employee Benefit Research Institute’s (EBRI) fourth annual study on the state of HSAs.

How HSAs work

If you have a high-deductible health insurance plan, you are probably eligible to open a Health Savings Account. Seen as one of the bright spots in an otherwise confusing and costly health insurance marketplace, HSAs offer a triple dose of tax benefits. Contributions are tax deductible, and as long as the funds are used for qualified medical expenses (deductibles, co-pays, prescription medicine, and more), earnings are tax-free and so are withdrawals.

According to the EBRI, there were 20 million HSAs in use at the end of 2016. Spurred by the rapid growth of high-deductible health insurance plans, the vast majority of HSAs (77%) were opened since 2013.

Users could save more

While HSAs are quickly gaining acceptance, relatively few users are taking full advantage of account benefits. In 2016, when individuals were allowed to contribute $3,350 to an HSA and families could contribute $6,750, the average contribution was less than $2,000 (EBRI did not split out individual vs. family account contributions). Just 13% of people with an HSA contributed the full allowable amount.

This year, the annual contribution limit for individuals is slightly higher than it was in 2016 for individuals ($3,400) and the same as it was for families ($6,750). Those figures will increase to $3,450 and $6,900 in 2018. People age 55 or older are allowed to contribute an additional $1,000.

Where HSAs really shine

HSA balances may be carried over from year to year, which is a key way they differ from flexible spending accounts. Many HSA users are taking advantage of that provision, with more than 90% of account holders bringing a 2016 year-end balance into 2017, according to the EBRI. And the average balance is growing. It totaled $2,532 at the end of 2016 — up from $1,604 at the beginning of the year.

Account holders’ rising balances give them the potential to use one of an HSA’s most powerful benefits — the ability to build a significant nest egg earmarked for later life healthcare costs.

They can do so by taking advantage of the unique triple tax benefits mentioned earlier, along with another underutilized benefit — the ability to not just save money in an HSA but also to invest. Together, these benefits make an HSA something of a super-charged healthcare IRA.

If you don’t need all of the money you contribute to an HSA in the current year, you can let the balance grow — and invest some of it — to help cover future healthcare costs, including Medicare and long-term care insurance premiums.

Another option, which is applicable to wealthier HSA account holders, works like this: Use non-HSA funds for current healthcare costs, save the receipts, and then reimburse yourself for those costs down the road in retirement. This idea can be a real wealth builder for those who invest their HSA balance and are able to earn a decent rate of return.

An idea whose time has not yet come?

At of 2016, just 3% of HSA accounts had invested assets, according to the EBRI.

There are probably many reasons for this. Some HSA users may not know that investing some of their balance is an option. Many more are likely unaware of — or in a position to take advantage of — the strategy of paying current healthcare expenses with non-HSA funds and reimbursing themselves later from hopefully appreciated HSA account balances. Plus, when Morningstar analyzed the HSA landscape from an investing perspective, it did not find very many providers that offered a combination of good investment options and low fees.

Of course, Morningstar used its star rating system to assess the suitability of various custodians’ mutual fund lineups. In a future post or newsletter article, we’ll take a closer look at this issue through our unique filter, assessing the funds at various HSA custodians based on their suitability for use with SMI’s strategies.

In the meantime, HSA Search offers a decent starting point for anyone wanting to compare the features and fees at different HSA providers.

Do you have a Health Savings Account? If so, where? Are you investing some of your balance?