Health Savings Accounts (HSAs): Understanding Fees and Benefits

A reader sent in a question about her Health Savings Account that she has with a former employer.

The problem is that the fees are costing her more each period than she is earning in interest. Slowly, but surely, the account is losing value. Here is her question:

Hi, NM, thanks for writing in. As you mentioned, the Health Savings Account (HSA) is a tax advantaged medical savings account that gives owners certain tax benefits.

Like many retirement accounts, there are HSA contribution limits that limit the amount you can contribute in any given year.

Before we answer your question about HSA fees, let’s cover a couple important aspects of the HSA, which will help answer your question and potential reader questions.

What Is A Health Savings Account?

In some ways, an HSA is similar to a tax deferred retirement plan – HSA holders contribute pre-tax money into the HSA and withdrawals must be made under certain circumstances or they are hit with early withdrawal penalties similar to early withdrawal penalties for retirement plans.

HSA contributions may be invested in the same manner as an IRA is invested, giving your HSA the opportunity to gain value over time.

Like investing with an IRA, HSA plan owners control where and how the HSA funds are invested.

Withdrawing money from your HSA is different from withdrawing money from a retirement plan because HSA withdrawals that are made for qualified medical expenses are tax free – giving you much more bang for your buck.

Who Can Have An HSA?

To open a Health Savings Account, you must be enrolled in a qualified High Deductible Health Plan (HDHP), which is a type of health plan that has a higher deductible than common health care plans and has a maximum out of pocket limit.

It is important to note that to be able to use your HSA, you may not have any other form of health insurance (other than vision or dental).*

To find a health insurance plan that is eligible for an HSA you should check your employer’s health insurance options during open enrollment, you can search for insurance rate quotes at eHealthInsurance.com to get multiple quotes.

Where Can You Get An HSA?

People can sign up for Health Savings Accounts with banks, credit unions, insurance companies, and other approved HSA trustees or custodians.

Some employers also set up a HSA plans for their employees.

How Much Does An HSA Cost?

Ahh, here is the kicker – the HSA itself is not something that is purchased; it is a savings account that you may contribute to on a tax-preferred basis.

Any fees are the fees imposed by the HSA trustee or custodian. This is where it is important to shop around when you are searching for an HSA trustee.

If your employer sets up the HSA plan for their employees, then you may not have any say regarding your HSA custodial fees, but once your employment ends, you can transfer your HSA into another HSA and control the amount of fees you pay.

Transferring An HSA

HSA account holders can only transfer their funds to another HSA account or withdraw the funds. There isn’t any other way to access your money.

I recommend contacting a qualified HSA custodian for more details about doing an HSA rollover.

All credit unions are automatically qualified to act as an HSA trustee or HSA custodian, so you may check with your local credit union for more details – just be sure to shop around for lower rates before transferring your funds.

Also, there are changes to health care every year, so make sure you stay up to date about what HSAs offer.

Here is what some other bloggers have to say about the HSA question:

Plonkee from Plonkee.com:

Jamie from I’ve Paid Twice for This Already:

Ryan: NM, I think your best bet is to look for another HSA custodian. This will take a little work on your end, but it is likely much better than paying the early withdrawal fees of 10%, plus the taxes on your contributions. Good luck!

More HSA related information:

• Health Savings Accounts and Other Tax Favored Health Plans – PDF document from the IRS.
• HSA – Wikipedia.

* There are certain exceptions that one may have an HSA with another form of insurance, but they are out of the scope of this article. Please see the additional resources or contact a qualified health care or tax professional for more details.