When my wife and I decided to change our health insurance to a high deductible health plan with a health savings account, we were driven by one goal: we could save enough money in just six months with the high deductible plan to pay all out-of-pocket costs associated with that plan.
One area we weren’t concerned with was fees. However, a recent report by the Consumer Financial Protection Bureau warns that fees and low interest on savings may quickly eat into your account balance.
What is an HSA?
A health savings account (HSA) allows people who have a high-deductible health plan (HDHP) to save for their healthcare expenses. If you have a HDHP through your company, your contributions to the HSA will be withdrawn before taxes are assessed. If you pay on your own, you will receive a tax credit when you file. You also do not have to pay taxes on the amount you withdraw if you use that money for healthcare.
While HSAs are called savings accounts, most offer the participant an option to invest the majority of their savings in mutual funds, exchange traded funds, or even individual stocks and bonds. Many plans require the participant to keep a portion of the funds as savings (often $1,000) in case they have medical bills that need to be paid – this minimizes having to sell investments every time someone has a health event.
How popular are HSAs?
The Consumer Financial Protection Bureau (CFPB) notes that HSAs have grown by 500% since 2013, and today hold more than $116B in 35 million accounts. As they have become more popular, participants have noticed higher fees and lower yields than found in other tax-advantaged accounts.
Savings earning little interest
Consumers have complained about the extremely low interest paid on their savings, especially at a time when many money market funds are paying more than 5%. The CFPB noted that some HSAs pay no interest, while others max out at 1%.
Management fees
If you select a HDHP plan with an HSA through your employer, you are forced to use the company they hired to manage the program. While there are some companies out there that offer no-fee HSAs, the largest often impose management fees, transfer fees, and account closure fees. Monthly account maintenance fees can be $4 or more. The fee to transfer funds may top $20, and to close the account consumers might have to pay $25 or more. Some employers cover these fees as part of their benefits; other times, consumers are surprised to see a line item on their statements noting all the fees that were withdrawn. Some unfortunate consumers have seen their funds disappear during the transfer process as well.
Other fees
As with any account, investing your HSA money in a mutual fund will necessitate paying fund management fees. Just like investing in your retirement plan, index funds will normally have lower fees while actively managed funds may have higher fees.
Additionally, some companies might charge you for ordering a debit card, or when using the debit card for ATM withdrawals. Or you may be assessed a statement fee if you don’t agree to electronic statements.
These fees hit the smaller account balances harder
If you have saved $100,000, a $4 per month fee (or $48 per year) would be negligible. For someone with just a few thousand in their account, or perhaps someone who is using the account on an ongoing basis to pay for healthcare and only has $500 in the account, these fees could be onerous. If you’re having a hard time affording your prescription medication, seeing $48 removed every year could cause a hardship.
What can you do
If you’re funding your own HSA and can choose any provider, look closely at the fee structures available with online brokers. There are several that offer no-fee HSAs, and accounts take ten minutes or less to establish.
If you are participating through your employer, talk to others in your company who also participate in the HSA. How do they feel about the fees? Have they experienced issues with lost or slow account transfers? While one person complaining might not cause waves, a group of people explaining their concerns to HR could result in the company either negotiating lower fees, deciding to cover the fees, or changing companies.
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