Personal Finance

This key fact can wipe the shine off a health savings account

Key Points
  • Health savings accounts allow you to save pretax dollars, and grow and use them tax-free, as long as the money goes to qualified medical costs.
  • In 2019, individuals with high-deductible health coverage can contribute up to $3,500 to an HSA. Contributions are capped at $7,000 for people with family coverage.
  • An array of fees may apply to your account, including fund expenses, maintenance costs and other surprise charges.
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Health saving accounts allow you to sock away cash for present and future medical costs. Just make sure high expenses aren't devouring your balance.

So-called HSAs allow you to put away money on a pretax or tax-deductible basis, have it accumulate interest free of tax and then tap the cash tax-free if you're using it to cover qualified medical expenses.

They're often paired with high-deductible health plans, particularly at the workplace.

Despite the virtues of HSAs, savers who want to decouple their account from their employer and shop around may run into problems.

They may not know much about the fees that apply to the accounts.

Employers tend to foot the bill for those costs in workplace plans, said Eric Remjeske, president of Devenir, an HSA consultancy.

"Getting the information you need from the HSA plans to compare one to the other isn't an easy task, so that can make it challenging for an individual who wants to select a plan," said Leo Acheson, associate director of multi-asset and alternative strategies at Morningstar.

Here's what you should know if you're shopping for an HSA on your own.

Understand expenses

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In 2019, you can contribute up to $3,500 to an HSA if you have individual coverage. That number rises to $7,000 for family plans.

You can roll over any unused account balances from one year to the next, which means you can contribute to your HSA and tap it to cover retirement health-care expenses. You can't contribute to your HSA once you're on Medicare, however.

Regardless of whether you're using your savings to cover medical expenses now or years later, get to know the different fees you'll see as you browse HSA providers.

Maintenance fees: These expenses cover administrative and operational costs and may apply monthly.

A recent HSA analysis from Morningstar found that plans that offer HSA checking accounts — that is, accounts that credit some interest but offer no investment options — charge $2 to $4.50 a month in maintenance costs.

Some providers drop maintenance charges once savers have accumulated a certain amount of money.

"For small account balances, a dollar-based fee is more impactful than it is for a large account," said Acheson.

Additional costs: Providers can charge you for excess contributions and paper statements, as well as ATM distributions, checks and wire transfers.

Those costs will vary: A paper statement can cost $1 to $5, but providers can slap fees upward of $25 for excess contributions and overdrafts, Morningstar found.

Investment expenses: If your HSA provider offers mutual funds and exchange-traded funds, you can expect to be levied an investment fee, plus the cost of the underlying funds you select.

Underlying fund costs average 0.04 percent to 0.71 percent, according to Morningstar.

Spending or investing

When deciding which provider is right for you, think about the way you intend to use your funds: Do you intend to tap your savings right away for ongoing health expenses, or do you expect to save the money long term and grow your balance?

This matters because different fees may apply below certain asset thresholds.

"Those who are using the money to cover medical costs should consider what's the maintenance fee and the interest you earn on the assets in the checking account," said Acheson.

Providers may waive their maintenance fee and credit higher rates of interest if you maintain a higher balance.

See below for Morningstar's rankings of HSA providers for users who intend to spend their balances.

If you're investing your HSA balance, consider how your provider will charge you. Dollar-based fees are kinder to large balances.

"Whether it's $5,000 or $50,000, with a large account balance, you'll pay more in fees with a fixed expense ratio," said Acheson.

You should also think about the investments available to you.

Plans with index funds tend to be on the cheap side, with an average fee of 0.56 percent, according to Morningstar. That fee considers the cost of the underlying fund and the maintenance and investment fees.

In comparison, plans with actively managed funds have an average all-in fee of 1.05 percent.

See below for Morningstar's rankings of HSA providers for individuals who will invest their savings.

Ask about features

As you shop around, don't forget to ask about the features your HSA provider may offer.

This can range from document vaults, where you photograph and upload your receipt when you pay for medical costs, to concierge services that will help you compare prices and shop for doctors, said Remjeske.

"People should be looking at these and thinking 'What do you get for what you pay? What kind of HSA do you want?'" he said.

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