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What to do About Health Savings Accounts with High Fees

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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:

I have an HSA that I started a former employer. It is a Health care Savings Account, not a Flex Spending account. Basically, it works almost the same as a 401K with most of the same rules and penalties.

My dilemma is this: I have about $2000 in the account. I’m earning about $7 interest on that each period, but paying about $12 in maintenance fees, so the money is slowly disappearing. Since I’m no longer at that employer, I cannot make contributions to the account, and obviously, my former employer is no longer making their contributions.

What should I do with this money? As far as I can tell, I cannot roll it over into a 401K or IRA. If I withdraw it, I’m stuck with the 10% early withdrawal penalty and I’ll have to pay taxes on it, which will eat up half the balance.

I can use the money to pay for any kind of medical or health expense, including massages, health club memberships, acupuncture, doctor visits, dental appointments, etc. But, I’m healthy and don’t really have medical expenses at this time outside of routine checkups. Let’s hope it stays that way.

Thanks, NM

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. 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 an HSA?

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 on this site, or visit 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.

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

Plonkee from Plonkee.com:

Well, you can rollover HSAs even if you are not otherwise eligible to contribute any more so you might want to investigate a cheaper provider, or investing it for the longer term – any IRA provider is deemed eligible by the IRS to be an HSA trustee, so there might be some choice for you.

The chances are that the money will come in useful for some health expenses further on down the road – you can use it for CORBA insurance payments, health care for your spouse, kids or other dependents (kids often have medical expenses), and to a certain extent long term care insurance.

If you withdraw the money you’re likely to pay several hundred dollars in taxes – it would take something like 8-10 years for the HSA to erode that much in value, even at the current rate of loss and including inflation. If you can’t find anywhere cheaper to put it, then you’ll need to make a judgment as to whether you can spend in the region of $200-$250 a year on qualified health expenses.

Jamie from I’ve Paid Twice for This Already:

All I would do is move it to a different HSA account with less fees. I know my spouse’s work has a fee-free one, so plans with very low fees must exist. Check around your local area for insurance companies or credit unions that offer HSA plans. And then wait until you have a health care issue you need to pay for so you can use the contents of your HSA.

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:

* 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.


Published or updated March 20, 2014.
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{ 9 comments… read them below or add one }

1 Rob G.

I would spend down the money on qualified expenses as quickly as possible. If you know you will spend $2000 this year on qualified items pull the entire amount out now to avoid fees and earmark it for the future expenses. As long as you incur the expenses in ’09 you should be ok.

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2 Miranda

We are considering a Health Savings Account. Thanks for this informative post. We will use it as we evaluate our options.

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3 Tom

I have to admit, I have never heard of such savings plans before.
In Canada, we have socialized medicine, so the cost (rarely) is an issue.

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4 karen pataluna

i understand the out-of-pocket expenses, but who takes care of the medical needs like a mamogram or other medical conditions. How does that work? thank you

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5 Ryan

Karen, Some plans cover annual checkups and exams (often referred to as “preventive health care”) as part of the plan without any additional fees. Some insurance companies classify these exams the same as any other doctor visit and you pay for them out of pocket, unless you have reached your deductible. Be sure to read your plan closely to be sure how your insurance policy treats these visits.

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6 Dan Kelly

I can’t find the answer to this question anywhere.

Say your MSA account balance is $50. You have a medical expense of $100. Can this be paid? It would put the account in a negative $50 balance.

Sincerely,

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7 Ryan

Dan, It may be possible to pay with the balance of your account, then pay the difference with cash. Contact your plan manager for more information.

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8 Craig

If my wife were to get a qualifying HDHP plan and open up a HSA would I be able to use the money in the HSA even though I am not covered under her HDHP? I am currently insured by my employer and I do not believe it is considered a HDHP but I could change to a HDHP…the problem comes in when I add my wife the rate jumps from 6.07 per pay period to 219 per pay period. Thanks for your time and any information would be helpful since I have heard and read both answers.

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9 Ryan

Craig, I believe the person who receives the funds from the HSA needs to be on the plan associated with the HSA. Your issue is not uncommon – many employers offer better benefits to their employees than they do for their employee’s family members. I know several people who have separate health care plans because of similar issues.

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