How to Escape From a Lousy Health Savings Account

Like it or not, there’s a good chance that a high-deductible healthcare plan, along with a health savings account, will be coming your way during benefits open enrollment this year.

In 2019, 62% of all large employers (those with more than 1,000 employees) fielded a high-deductible healthcare plan with a savings account option on their benefits menu, according to data from the Kaiser Family Foundation. Smaller employers were less likely to field an HDHP, but the uptake of HDHPs has nonetheless been rapid across employers of all sizes over the past decade.

Among those employees who can choose between a high-deductible healthcare plan and a PPO, many reflexively avoid the high-deductible healthcare plan because of the uncertainty factor—the fact that the employee must shoulder some if not most of his or her own healthcare costs until meeting the deductible. In reality, however, the high-deductible healthcare plan/HSA combo can be a good deal in many cases. High-deductible healthcare plan premiums are usually lower than PPO premiums—the premiums are 42% lower than PPO premiums for people with single coverage and 40% lower for people with family coverage, according to SHRM’s 2018 data.

The health savings accounts that are often on offer alongside high-deductible healthcare plans offer generous tax benefits, too: Pretax dollars go in, invested assets grow tax-free, and qualified withdrawals are tax-free. Those HSA tax benefits can be particularly valuable to people who can afford to pay their healthcare expenses out of pocket (using non-HSA assets), thereby letting the HSA assets compound on a tax-advantaged basis.

Yet many people covered by an HSA don't have the luxury of using their HSAs in this way and certainly don't have the funds on hand to contribute the full max to the account; in 2019, that's $3,500 for people covered by a single-only plan and $7,000 for people covered by a family plan.

It's also possible that some would-be HSA savers have declined to take full advantage of their HSA to invest because they've done their due diligence on their employer-provided HSA plan and found it lacking. Even though HSAs have exploded in popularity over the past decade and have improved from the standpoint of costs and investment lineups, many of them are larded with extra fees and/or feature subpar investment options. In Morningstar's just-released 2019 Health Savings Account report, just two of the 11 large HSAs reviewed, Fidelity and HSA Authority, received a rating of Positive for use as both spending and investing vehicles.

You’re Not Stuck What prospective HSA investors may miss, however, is that if they don’t like their “captive,” employer-provided HSA, it’s not the end of the line. Going outside of the captive HSA does not require one to forgo HSA payroll deductions—and the tax breaks that come along with them. Instead, it’s possible to use an employer-provided HSA to take advantage of automatic payroll deductions, then periodically transfer the money to an HSA of one’s choice.

To identify the right HSA provider for you, step back and think about how you’ll be using the HSA. Will you be a spender, using the assets to cover healthcare costs? Or are you planning to use your HSA as a supplementary retirement savings vehicle, thereby taking maximum advantage of the HSA’s tax-saving features? Perhaps you’re multitasking, planning to use your HSA for any healthcare costs that you incur but letting additional contributions ride and investing them in long-term assets.

Transfer Versus Rollover To get the money out of the HSA you don't like and into one that's better, you'll hit a fork in the road: You'll be forced to choose between a rollover or a transfer. There are some important differences.

With an HSA transfer, your existing provider is transferring the money directly to another HSA provider; the financial institutions are dealing with one another on the transaction and you’re not receiving a check yourself. You’ll need to have the new HSA account—the one that you’ll be transferring into—set up beforehand. You can conduct an unlimited number of transfers throughout the year, in contrast with a rollover, which you’re only able to execute once a year.

HSA transfers can therefore be a good fit for people who would like to make regular transfers from one HSA (such as the unloved employer-provided one, which you contribute to in order to take advantage of the tax breaks) to another, better one. Be sure to read the fine print of your HSA before conducting a transfer, however. Some HSAs assess fees on transfers out. Those fees might apply to partial transfers of HSA balances or, more commonly, if you’re transferring your whole balance out. Additionally, stay attuned to account maintenance fees levied on balances below a certain threshold—on both the employer-provided plan and the plan of your choice. You may need to maintain minimum balances to avoid getting nickel-and-dimed with low-balance fees.

An HSA rollover has more strings attached than a transfer. In contrast to a transfer, where the two trustees handle the funds and leave you out of it, a rollover means you get a check for your balance; you must deposit that money into another HSA within 60 days or it counts as an early withdrawal and a 20% penalty will apply if you're not yet 65 (or if you don't have receipts to support medical expenses equal to the amount of your withdrawal). Another key difference, as noted above, is that multiple transfers are permitted between HSAs, but you're only allowed one HSA rollover per 12-month period. A key reason to consider a rollover, however, is if doing so can help you circumvent transfer fees.

Another key point in this discussion is that if you’ve done your homework on your employer-provided HSA and found it lacking, be sure to let your employee benefits department know of your concerns and where you’ve identified better options. Employers generally like to encourage HSA usage, so they’re likely to be receptive to your feedback.