If you have a high-deductible health insurance policy, you have a ticket to a special benefit: You can contribute to a health savings account, which is a rare way to get a triple tax break. Your contributions are pretax (or tax-deductible), the money grows tax-deferred in the account and you can withdraw it tax-free for eligible medical expenses at any time, either now or in the future.
To qualify, you just need an HSA-eligible health insurance policy with a deductible of at least $1,400 if you have self-only coverage, or $2,800 for family coverage. If you have health insurance at work, your employer may make it easy to sign up and contribute to the HSA through payroll deduction, so your contributions will avoid both federal and Social Security taxes. Your employer may even add some money to your account. Employers contribute an average of $550 to employees’ HSA accounts for people with single health coverage and $1,080 for family coverage, according to the Kaiser Family Foundation’s 2020 Employer Health Benefits survey. Employers generally contribute the same amount for everyone who signs up, rather than matching contributions.
But if your employer doesn’t offer an HSA, or if you buy your health insurance on your own, you need to find an HSA provider yourself. Many banks, credit unions, brokerage firms, HSA-specific companies and other financial institutions offer the accounts. There are now more than 500 HSA providers, says Leo Acheson, director of multi-asset ratings, global manager research for Morningstar Research Services, who just completed an annual study of HSA providers. Many of the providers are small banks or credit unions, and a lot of big-name brokerage firms do not sell HSAs directly to individuals. The marketplace is dominated by four providers that had more than half the market share in mid-2020: Optum, HealthEquity, HSA Bank and Fidelity.
With so many HSA providers to choose from, it’s important to shop around because the fees, investing choices and rules can vary a lot. But some HSA providers have more transparency than others, and it can be complicated to compare plans. “Choosing an HSA is challenging given the industry’s young, opaque and frequently changing nature,” says Acheson. “Some HSA providers share the information you’re looking for, but others make it much harder to know the investment and maintenance fees before you sign up.” The Morningstar report evaluates and ranks 11 of the largest HSA providers for individuals. You can find basic information about the program features, fees and user ratings for hundreds of HSA providers at HSAsearch.com, including many small banks and credit unions as well as large firms.
How to Choose an HSA
Before you choose an HSA provider, consider how you’re going to use the money in the account. Do you plan to spend it on current medical expenses or invest it for the future? The Morningstar analysis found that the HSA providers that are best for spenders are generally different from the providers that are best for investors (except for Fidelity Investments, which tops both lists).
Spenders withdraw money from their HSAs as they need it for current medical expenses, so they’re most interested in accounts that avoid maintenance fees and do not have a lot of additional fees, and that offer reasonable interest rates and FDIC insurance on deposits. Some of these HSAs may also have a debit card that makes it easy to spend the money at the drugstore or doctor’s office.
The Morningstar study selected Fidelity and Lively as the best HSAs for spenders, with HealthEquity and the HSA Authority also performing well for spenders. None of those providers charge maintenance fees.
“For spenders, the maintenance fee is the overwhelming consideration,” says Acheson, especially since interest rates are so low everywhere and don’t make as big a difference now. He found a big range in maintenance fees depending on the balance in the account. For people with an account balance of $500 or less, the fees ranged from $0 to $42 per year. With an average account balance of about $1,000, fees ranged from $0 to $36.
There are also steps you can take to help reduce your fees at some HSA providers. “You see a fair amount of people paying something like $15 to $20 a year for paper statements,” says Acheson. “You can easily opt out and get an electronic statement.”
Investors keep the money growing in the account and use other cash for current medical bills. The money can grow tax-deferred for years and then be used tax-free for medical expenses in the future. An HSA can also be a great way to build up tax-advantaged savings for health care costs in retirement: After you turn 65, you can use money from the HSA tax-free to pay premiums for Medicare Part B, Part D and Medicare Advantage plans, in addition to other out-of-pocket medical expenses.
For these people, the investing options and fees make a big difference. Most of the HSAs let you invest in a menu of several mutual funds, and some offer a brokerage option. The fund choices have improved over the past few years, says Acheson. “When we first started evaluating HSAs in 2017, a number of them had holes in their investment lineups and didn’t have some core offerings,” he says. “But since then, every one of them includes well-rounded lineups with all asset classes.” Most offer low-cost index funds and actively managed funds, too.
Some HSA providers charge an extra fee just to be able to invest in addition to the underlying fund fees. Those fees can vary significantly, from $0 to 0.50% of the account balance, says Acheson.
Another major difference: Some HSA providers (four of the 11) let you invest all of your HSA money, but the rest require you to keep some money in the checking account before you can invest, with the amount ranging from $500 to $2,000. “If you have to keep $2,000 in the checking account before you can invest, that can be a significant opportunity cost,” he says. “The investment threshold is almost like an indirect fee.”
The Morningstar study selected Fidelity as the top HSA for investors. Bank of America, the HSA Authority and HealthEquity also performed well for investors.
How to Switch HSA Providers
If you already have an HSA and discover that the fees or investing options are much better somewhere else, you can transfer the money from one HSA provider to another tax-free, similar to the way you would do an IRA transfer.
“The process to move an HSA from one provider to another is called transfer of assets, which is also referred to as a trustee-to-trustee transfer or a direct transfer” says Rita Assaf, vice president of retail health savings accounts for Fidelity Investments. “With this type of transfer, your current HSA provider transfers assets directly to your new provider without you getting involved with the money movement. It won’t show up on a tax form at the end of the year, and it doesn’t count toward your annual contribution limits.”
You can either transfer the entire balance or do partial transfers. There is no limit to the number of direct transfers you can make, but some providers charge a fee to make the transfer or a fee if your balance falls below a certain level. There is no limit to the number of HSAs you have, but your total contributions can’t exceed the annual limit, even if you have several accounts.
To begin the transfer, you need to have an account opened at the new HSA provider and then you can usually request a transfer of assets either through a paper form or an online process. It helps to have a current statement from your current provider on hand to help answer any questions, says Assaf. The specific procedure can vary by firm.
Another option, instead of doing a direct transfer, would be to roll over money from one provider to another. In that case, a check is sent directly to you, and you have to deposit it into another HSA within 60 days or tax penalties may apply, says Assaf. You are only allowed to do that kind of rollover once per 12-month period, and the rollover is reportable on a 1099 tax form. (A direct transfer of assets, on the other hand, is not reported.)
If you have an HSA through your employer but discover that its fees and investing choices aren’t very good, you may want to have two HSA accounts. “If you find an HSA provider with lower fees and better investing choices than your employer’s option, it may be good to consider keeping your employer HSA for accepting the pretax payroll contributions then periodically transferring part of your balance to a retail HSA at another provider,” says Assaf. “You’ll get the advantage of avoiding FICA (Social Security and Medicare) taxes on your contributions made through payroll deduction and saving on potentially lower fees and better investment options.”
How to Make the Most of Your HSA for 2020 and 2021
It’s not too late to open an HSA and contribute to the account for this year – in fact, you have until April 15, 2021, to make tax-deductible contributions for 2020. If you had an HSA-eligible health insurance policy for all of 2020, then you can contribute up to $3,550 if you have self-only coverage, or up to $7,100 if you have family coverage (plus an extra $1,000 if you’re 55 or older). If you only had an eligible policy for part of the year, your contributions may be prorated based on the number of months you had eligible coverage.
Also keep the benefits of an HSA in mind when choosing your health insurance plan for 2021. You’ll be able to contribute up to $3,600 to the HSA for 2021 if you have self-only coverage or $7,200 for family coverage (plus $1,000 if you’re 55 or older in 2021).
You can withdraw money tax-free from the HSA at any time to pay your health insurance deductible, copayments, your out-of-pocket costs for prescription drugs and other eligible medical bills, dental and vision expenses that aren’t covered by your insurance, and a portion of long-term care insurance premiums based on your age. After age 65, you can also use the money tax-free to pay premiums for Medicare Part B, Part D and Medicare Advantage plans.
Despite the tax benefits of having the HSA money grow in the account for the long term, Morningstar found that only about 6% of account holders invest their HSA dollars. But those account holders make up a disproportionate 27% of total assets. “It’s ideal to invest because you take better advantage of the tax advantages the HSA offers with tax-free growth, but the reality is that a lot of people don’t have the means to do that,” says Acheson.