How to Get the Most From a Health Savings Account

Posted December 7, 2018 3:56 p.m. EST

Choosing a health savings account can be daunting, especially for people funding one for the first time. But some comparison shopping can help minimize fees and maximize savings, researchers say. (Minh Uong/The New York Times)

Choosing a health savings account can be daunting, especially for people funding one for the first time. But some comparison shopping can help minimize fees and maximize savings, researchers say.

Providers of health savings accounts are generally doing a better job of disclosing details like fees and investment options, said Leo Acheson, associate director of multiasset and alternative strategies at the financial research firm Morningstar. But, he added, “there’s still some room for improvement.”

While updating an analysis of 10 big providers of the accounts, he said, Morningstar found that just four made all details — like fees charged — available on their websites.

A health savings account, or HSA — available when paired with a specific type of high-deductible health insurance plan — offers triple tax benefits. You can contribute to an HSA through paycheck deductions, reducing your taxable income; interest or investment gains are tax free; and withdrawals aren’t taxed, either, as long as you spend the money on eligible items or treatment. (If you don’t have health coverage through your employer, you can make tax-deductible contributions on your own to an HSA, as long you have a compatible health plan.)

Money in the accounts can be used for current health and medical expenses, or invested for care in the future. According to Fidelity Investments, a couple who are 65 years old and retiring in 2018 may need about $280,000 to cover health costs in retirement, and funding an HSA can help with that burden.

But most HSA holders don’t appear to be saving for the long term, according to findings from the Employee Benefit Research Institute, which analyzed a database of about 6 million accounts. Most account holders, the institute reported in October, appear to be using HSAs as “specialized checking accounts,” not investment accounts.

People generally use the money to cover current costs, like deductibles and copayments, rather than contributing as much as possible and investing for the future. Overall, two-thirds of account holders withdrew funds — an average of $1,725 — in 2017. Just 5 percent of account holders had investments other than cash.

That may be because most people simply can’t afford to pay for health care out of pocket and need the cash in the accounts for medical bills, said Paul Fronstin, director of the institute’s health research and education program. Or, he said, it could be that people still think of HSAs as flexible health spending accounts, a different sort of workplace account with fewer perks. Unlike those accounts, HSAs are portable, so you can take yours with you if you change jobs.

Over time, however, HSA holders appear to become more comfortable with investing. In 2017, for instance, 10 percent of accounts that had been opened a decade earlier had investments other than cash, compared with just 2 percent of those opened in 2017, the institute found.

“It takes time to learn how these things work,” Fronstin said.

Whether you are using your HSA for saving or for investing, it’s wise to compare fees and other features offered by different accounts, Acheson said.

If you have health insurance through your employer, your HSA account is usually chosen for you, and your employer probably pays any monthly maintenance fee. But if you’re buying insurance on your own — or if you don’t like the investment options available in the account your employer offers — you can choose another account provider. Acheson suggests keeping your company’s HSA to receive any employer contributions, then transferring the money periodically to the second HSA.

Morningstar recently rated 10 large account providers available to individuals, based on whether the account is mainly for spending, or for investing.

Spenders should look for HSAs that offer checking accounts with no monthly maintenance fees, reasonable interest on deposits and Federal Deposit Insurance Corp. insurance, Acheson said.

Investors should also look for low fees, whether on “passive” index fund investments or actively managed funds, and no threshold on investments or a low one. (Some accounts require a minimum balance — often $1,000 to $2,000 — to be maintained in the checking account before money can be invested.) Morningstar ranked the HSA Authority, offering accounts through Old National Bank in Indiana, as the best for both spenders and investors.

Fifth Third Bank’s HSA is “compelling” for spenders, the report found, if they are able to keep an average of at least $4,000 in their checking account. The bank paid a somewhat higher interest rate on deposits, and if that $4,000 balance was maintained, the bank waived its monthly fee.

Accounts from Further, an account administrator formerly known as SelectAccount, and Bank of America were deemed “solid” choices for investors.

(The analysis didn’t include HSAs from Fidelity because the company didn’t begin offering the accounts to individuals outside employer plans until Nov. 15, after the report was completed.)

Eric Remjeske, president of HSA research firm Devenir, said that it made sense to evaluate the costs of a plan, but that consumers should also consider what they were getting for the extra fees. Some higher-fee accounts, for instance, may offer more services, like the availability of “robo” advisers to help with investment selections.

Devenir offers, a tool that includes more than 500 accounts, to help consumers compare HSAs.

Here are some questions and answers about health savings accounts:

Q: How much can I contribute to an HSA for 2018?

A: An individual can contribute up to $3,450 for 2018, while the limit for family coverage is $6,900. (Those limits will increase to $3,500 and $7,000 for 2019.) People 55 and older can contribute an extra $1,000. Contributions for this year can be made up until the tax filing deadline in April.

Q: How do I know if my health plan is compatible with an HSA?

A: Most plans that qualify to have a health savings account will be labeled “HSA eligible.” If you’re not sure, ask the insurance company or your employer. For 2018, criteria include a deductible of at least $1,350 for an individual and $2,700 for a family. (Minimum deductibles won’t change in 2019, the Internal Revenue Service has said.)

Q: What can I buy with my HSA?

A: You can spend the money on a wide variety of “qualified” expenses, including doctor visits, eyeglasses, fertility treatment and drug addiction treatment. For a complete list, see IRS Publication 502. Be sure to keep receipts, or benefit statements from your insurer, in case you have to document your spending, Fronstin said. If you spend the money on noneligible items, the withdrawal is taxed as income, plus a 20 percent penalty. (After you turn 65, the penalty goes away, and you’ll pay just income taxes on nonqualified withdrawals.)