Summary

  • HealthEquity reported a 3.83% average annualized yield on HSA cash in fiscal Q2 2027, while the average annualized rate of interest retained by members was 0.26%. The simple difference was 3.57 percentage points, 30 basis points wider than a year earlier.
  • The denominator is not HealthEquity’s US$37.9 billion of assets. Those assets belong to members and include US$17.369 billion of cash plus US$20.552 billion of investments. Only the cash ledger sits under the reported rates.
  • Contract cohorts slow the transmission of market rates: insurance agreements reprice about 10% of their assets each year, depository agreements usually last three to five years, and Treasury forwards hedge part of future placements. A cohort-level spread bridge is the missing disclosure.

The first ledger belongs to members

HealthEquity calls the US$37.921 billion administered at 31 July 2026 “HSA Assets.” The capitalization matters less than the ownership sentence that follows it. These are custodial funds held on behalf of members, not cash available for the company to spend.

The total also contains two unlike assets. HSA cash was US$17.369 billion. HSA investments, held by a custodial investment partner, were US$20.552 billion. Cash was 45.8% of the total by simple arithmetic; investments were 54.2%. A headline that applies 3.83% or 0.26% to all US$37.9 billion would therefore combine a deposit-like cash book with securities that sit on another return ledger.

That distinction is becoming more important. Total HSA Assets rose 14% from a year earlier, but cash rose only 2% while investments rose 28%. Contributions added to the system, market values increased and members transferred money from cash into investments. Asset growth did not translate one-for-one into a larger balance on which HealthEquity earns its reported cash yield.

Corporate liquidity is separate again. HealthEquity reported US$256.0 million of cash and cash equivalents. It also held US$931 million of Client-held funds that employers and other clients remitted to pre-fund complementary benefit accounts. Those client funds generate custodial revenue too, but they are not HSA cash. Three balances—company cash, client-prefunding cash and member HSA cash—must remain three balances.

Half the quarter’s revenue came from custody

HealthEquity earned US$350.732 million of revenue in fiscal Q2 2027. Custodial revenue was US$175.936 million, service revenue US$124.444 million and interchange revenue US$50.352 million. Custody therefore supplied 50.16% of the quarter’s revenue by BTW arithmetic.

This is not merely interest passed through from a bank account. HealthEquity is a non-bank custodian. It places member cash with insurance companies through group annuity contracts or similar arrangements under its Enhanced Rates offering, and with federally insured banks and credit unions under Basic Rates. It earns custodial revenue from the contracted rates those partners offer on average balances. It also earns on Client-held funds placed in floating-rate demand accounts.

The company’s average annualized HSA-cash yield increased from 3.51% to 3.83% year on year. It attributes the change mainly to more participation in Enhanced Rates and to depository cash placed at higher yields. Average daily HSA cash rose only 2%, to US$17.388 billion, while quarterly custodial revenue increased 10%. Price and placement mix therefore did more of the work than balance growth.

The other side of the rate ledger moved too. Members retained an average annualized 0.26% on HSA cash, up from 0.24%. HealthEquity describes member interest as tiered; rates can change through a formula or after required notice. The number is an average, not a promise that every account received exactly 0.26%.

Subtracting the two reported averages produces 3.57 percentage points, compared with 3.27 points in the prior-year quarter. That 30-basis-point widening is useful because it isolates the direction of the gross rate relationship. It is not a reported take rate or net margin.

There are at least three reasons for restraint. Custodial revenue includes the separate Client-held-fund book. Custodial costs include both member interest and fees paid to banking consultants. And the two average rates do not expose the balance and rate of each contract cohort. The US$12.083 million custodial-cost line cannot be renamed “interest paid to members,” just as the 3.57-point difference cannot be renamed profit.

Basic and Enhanced are also different clocks

Enhanced Rates is more than a retail label. Insurance-partner agreements have indefinite terms, and approximately 10% of the assets in those agreements reprice each year. Depository Partner contracts typically last three to five years and may be fixed or variable. New market rates therefore reach the book through renewals, placements and cohort turnover rather than all at once.

At the end of fiscal 2026, Enhanced Rates held 58% of HSA cash, up from 49% a year earlier. HealthEquity says insurance partners generally pay it a higher yield than Depository Partners and that members allocated to Enhanced Rates retain a higher yield than those in Basic Rates. Migration can benefit both sides of the rate ledger.

But the migration sentence has an important condition. As Basic contracts expire, HealthEquity expects their cash to move to Enhanced Rates subject to members retaining the right to keep their cash in Basic. The transition is a product default and contract strategy, not confiscation of an election.

The maturity schedule shows where the next changes can enter. Of US$17.4 billion of HSA cash, US$16.7 billion was assigned to fixed or scheduled cohorts with a 3.9% weighted average annualized yield; US$0.7 billion sat in floating-rate contracts. US$2.3 billion was scheduled to reprice during the remainder of fiscal 2027 at a current average yield of only 1.5%. Another US$2.5 billion was scheduled for fiscal 2028 at 4.0%.

The low-yield near-term block makes management’s expectation of higher renewal yields understandable. It does not guarantee the result. The replacement rate will depend on the prevailing Treasury curve, partner demand for deposits, contract capacity, member pricing and competitive pressure when the cohort actually rolls.

The rest of the schedule is a reminder that falling market rates would not hit every dollar immediately either. US$7.8 billion was placed in cohorts scheduled after fiscal 2030 at a current 4.4% average yield. A slow book can preserve attractive old pricing in a falling-rate cycle and delay attractive new pricing in a rising one. Duration is a stabilizer and a lag.

The hedge locks a benchmark, not the business outcome

HealthEquity also uses Treasury bond forwards to hedge part of the benchmark-rate risk on expected future HSA-cash placements. At quarter-end, 23 instruments had US$3.035 billion of notional amount and a 3.93% weighted-average indicated interest rate. Settlement dates ran from August 2026 to January 2029.

It is tempting to read 3.93% as the next HSA-cash yield. That would skip several joins. The forwards hedge a Treasury benchmark for selected future placements. They do not determine the spread an insurance or depository partner will offer, the member-retained rate, the size of cash available at settlement or the share that will remain in Basic.

The accounting also runs through time. Changes in fair value are recorded in accumulated other comprehensive income and reclassified into custodial revenue when the hedged transaction affects earnings. HealthEquity estimated that US$6.1 million of existing net forward losses would be reclassified into custodial revenue over the next 12 months. That loss is not missing member cash. It is the income-statement timing of a hedge on future placement economics.

This creates a four-part rate bridge: the market benchmark, the hedge result, the partner contract yield and the rate retained by members. Publishing only the endpoints makes the engine visible but not fully reconcilable.

What a useful spread bridge would show

The disclosure can improve without naming a bank or insurance company. HealthEquity could group HSA cash into Basic, Enhanced and floating cohorts; show opening balances, contributions, withdrawals and transfers into investments; then report what repriced, renewed, migrated or stayed in Basic by member election.

A second panel could separate HSA-cash custodial revenue from Client-held-fund revenue. A third could separate member interest from consultant fees inside custodial costs. Hedge notional, settlements and AOCI recycling could sit beside the contract cohorts they protect. The result would connect a dollar of member cash to its holder, current rate, next repricing date, member rate and income-statement effect without revealing confidential counterparties.

That bridge would answer the questions the two headline rates cannot. Did a wider spread come from an old low-yield cohort rolling upward, from more members in Enhanced Rates, from a slower member-rate response, from floating client funds or from hedge accounting? How much of the improvement is durable when rates fall? How much follows balance mix rather than pricing?

The judgment

HealthEquity’s filing reveals a powerful custodial engine. Custodial revenue supplied half of quarterly revenue, and the average HSA-cash yield rose faster than the average rate retained by members. The simple gap widened to 3.57 percentage points.

That is a reason to examine the engine, not to mislabel it. Members own the assets. More than half of HSA Assets were investments outside the cash-rate denominator. Product elections remain with members, partner contracts mature on different clocks and hedges cover only part of future placements. Direct costs and client funds prevent the two rates from being an income-statement margin.

The durable Market question is not whether 3.83 minus 0.26 equals 3.57. It is how much of that difference survives the next cohort renewal, the next member-rate decision and the next move in the yield curve. HealthEquity publishes enough to show the mechanism. A custodial spread bridge would show its persistence.

Sources