The Error-Proof Portfolio: Don't Get Nickel and Dimed by Your Health Savings Account

"I love my health savings account. But what's up with the fees?"

That was the gist of several emails and comments that followed my recent article about using a health savings account as a retirement-funding vehicle.

Numerous readers noted that they are enthused about the generous tax benefits that one receives by investing in an HSA: pretax contributions, tax-free compounding, and tax-free withdrawals for qualified health-care expenditures.

But they also pointed out that high fees have the potential to erode those advantages in a hurry. While consumer groups have been shining the spotlight on 401(k) fees for a while now--and have helped bring pressure on 401(k) providers to bring them down--many HSAs are larded with fees, despite their growing popularity. Although the savings account option in an HSA may carry a competitive yield relative to other types of cash accounts, that yield advantage can be quickly eroded with various types of account and transaction fees. And HSA participants who aim to earn a higher return on their money by investing in long-term securities like mutual funds and ETFs are also likely to run the gamut of charges, from ongoing maintenance charges to charges per transaction, all of which come on top of the mutual funds' expense ratios.

How They Add Up
Unfortunately, a review of some of the largest HSA plans indicates there's little uniformity of fee structures from provider to provider. An HSA that has no maintenance fee for people sticking with the deposit account, for example, may have much higher costs to buy and sell investments. As you assess the various fees associated with your HSA--or an HSA you're considering--here are some of the line items to focus on.

Setup Fee: A one-time fee imposed at the time of the health savings account setup.

Monthly or Annual Fee: Can apply to either the savings account option or to assets invested in mutual funds and ETFs. Usually a flat, dollar-based fee, meaning that these charges are less onerous, on a percentage basis, for participants with larger balances. These charges may also go away entirely for participants with large balances.

Transaction Fee: May be levied each time an individual pays for services using the health savings account.

Fund Expenses: Fees associated with the investment options the participant chooses; disclosed on Morningstar.com and in the fund's shareholder literature.

Sales Charge: May be levied on certain fund and ETF transactions.

How to Reduce Them
For individuals who face some or all of these costs, it's easy to see how they can add up, eroding the generous tax savings that one receives from participating in an HSA.

So, how can you control your HSA costs? Obviously, people who are investing in high-deductible health-care plans on their own--that is, not through their employers--have a lot more latitude to shop among health savings accounts to find the lowest-cost option given their anticipated spending and investing behaviors. People using employer-based HSAs, on the other hand, have less flexibility. While they technically can use an HSA provider other than the one their employer has designated, that can be cumbersome in practice; you won't be able to have your contributions automatically deducted from your paycheck, for example, and you'll have to write off your contributions on your tax return rather than making pretax contributions from your paycheck. Additionally, many employers offer at least some matching contributions on HSA contributions, but you may not be eligible for them unless you stick with your employer's HSA.

Know Your Habits and Goals
Will you be using your HSA to pay health-care costs as you incur them, or will you be using it as a secondary retirement-savings vehicle, as discussed in this article? If the former, you'll want to look for an account with little in the way of ongoing maintenance fees for the savings account and no charges for each transaction. Alliant Credit Union, for example, has no maintenance or transaction charges for participants who use its deposit account but does charge $5.95 per month for participants who invest their assets in the mutual fund lineup. That makes it a good fit for people paying health-care costs as they go along but more costly for investors, especially those with small balances.

By contrast, HSA Bank has a monthly charge for participants--$2.50 a month for those who stick with the deposit account and an additional $3.00 monthly fee for those investing in longer-term securities like mutual funds. But those fees are waived for those with deposit account balances over $4,925. That setup is better suited for people looking to amass significant assets in their HSAs rather than regularly tapping their accounts to cover health-care costs.

Strive for Critical Mass
As with banking and mutual funds, you may qualify for lower fees if you're able to maintain a high enough balance in your HSA--and that's generally true whether you keep the money in the savings account option or invest the money in longer-term securities such as mutual funds. (Specific breakpoints vary by provider.) You may be able to qualify for a higher yield on the savings account if you have a large balance, and ongoing maintenance fees may also be waived if your balance is over a predetermined level. The perks that come along with scale are one reason to consider paying health-care costs out of pocket until you've amassed more than enough in your HSA to qualify for asset-based fee reductions or waivers. Individuals with assets parked in an IRA can also boost their balances by rolling over the IRA into an HSA, assuming their total HSA contributions (rollover plus new contributions) don't exceed the annual limits ($3,300 for individuals and $6,550 for families).

If your HSA charges a transaction fee each time you move money from the deposit (savings) account into long-term investments, it's better to invest larger sums of money less frequently than it is to deploy smaller sums of money on a more regular basis. Most of these charges are levied on a dollar, rather than a percentage, basis, making them less onerous for larger purchases than for smaller ones.

Watch Investment Expenses
Even if your HSA has few sales charges and maintenance costs associated with investing in longer-term securities such as mutual funds and ETFs, you still need to do your due diligence on the investment options. It may be that even though the extra fees are low or nonexistent, the funds themselves have high costs relative to their peer groups, or simply aren't best of breed. Many banks offer HSAs, for example, but the investment lineups are limited to the house brand of mutual funds.

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