What is an HSA (Health Savings Account)?

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to individuals in the United States who are enrolled in High-Deductible Health Plans (HDHPs). Contributions to an HSA are made with pre-tax dollars, reducing taxable income. The funds in the account grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Unlike Flexible Spending Accounts (FSAs), HSA funds roll over annually and are portable, meaning they remain with the individual even if they change employers or health plans.

For 2025, the contribution limits for HSAs are $4,300 for individuals with self-only coverage and $8,550 for those with family coverage. Individuals aged 55 and above can make an additional catch-up contribution of $1,000.

To maximize the benefits of an HSA, individuals are advised to contribute the maximum allowable amount, take advantage of employer contributions, and consider investing the funds for long-term growth. HSAs can serve as an additional retirement savings vehicle, offering flexibility and tax advantages that can enhance financial security.

In this article, we explore our investment idea on HealthEquity Inc. (NASDAQ: HQY), the nation's largest health savings account (HSA) custodian, which continues to demonstrate impressive growth in the expanding HSA market. As of January 31, 2025, the company reported approximately 9.8 million HSAs, up 14% from 8.7 million a year earlier. This growth solidifies HealthEquity's position as a market leader, commanding a 20% market share in the HSA industry.

On the demand side, we believe that US consumers may start adopting HSA’s as their way of planning ahead for ever rising medical costs. As people get more unhealthy due to lifestyle diseases, they’ll need to start having more budgeted towards health. Their tighter budgets due to past inflation and wages lagging means that they’ll be more willing to take advantage of the tax-benefits that come with using HSA’s just to save some extra income

Financial Highlights

• Total HSA Assets: Projected to reach $32.1 billion by January 31, 2025, a 27% increase from $25.2 billion the previous year.

• Total Accounts: Expected to grow to 17 million by fiscal year-end 2025, up 9% from 15.7 million.

• Revenue: Forecasted to reach $1.3 billion in fiscal year 2025, with a 9.2% growth rate.

• Earnings Per Share (EPS): Projected to hit $3.71 in fiscal year 2025, representing a 17.8% increase.

Market Position and Growth Strategy

HealthEquity's B2B2C distribution strategy has proven highly effective in driving growth. By partnering with employers, benefits administrators, and health plans, the company efficiently scales its market reach while reducing customer acquisition costs. This approach has led to dependable, recurring revenue streams and enhanced client retention rates.

Industry Trends and Outlook

The HSA market continues to expand rapidly, with total HSA assets reaching $137 billion across 38 million accounts by mid-2024, according to HSAResearch by Devenir. This represents an 18% year-over-year increase in assets and a 5% increase in accounts. HealthEquity is well-positioned to capitalize on this growth, with its focus on technology-enabled solutions and strong market presence.

Competitive Landscape

While HealthEquity leads the market, it faces competition from major players like Fidelity, Optum, HSA Bank, and Lively. However, HealthEquity's continued innovation and strategic partnerships help maintain its competitive edge.

Outlook

HealthEquity projects 24.6% growth for the next five years, with expectations of continued improvements in its business. The company's focus on cost transparency, technology enablement, and partnerships positions it well to address the growing demand for affordable healthcare solutions.

Analyst sentiment remains positive, with 12 out of 13 analysts rating the stock as a "buy." The average 12-month price target is $113.54, indicating potential upside from current levels.

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