Be Sure You Understand HSA Rules Better Than This Owner or Her Bank!

Be Sure You Understand HSA Rules Better Than This Owner or Her Bank!

Not all Health Savings Accounts are created equal. Account owners who don't know this may lose some valuable benefits.

I recently came across a LinkedIn post in which someone asked readers to list the downside of Health Savings Accounts. The poster had learned about the benefits of these accounts (tax benefits, contribution flexibility, unlimited carryover of unused funds, supplemental retirement savings, and so forth) and wondered whether there were drawbacks to enrolling in a Health Savings Account program.

A number of readers responded. They pointed out that an owner must be enrolled in a high deductible health plan to fund a Health Savings Account and thus must pay at least $1,400 (self-only contract) or $2,800 (family plan). They noted that administrators often charge a nominal monthly fee to maintain these accounts.

All true.

And then there was a comment that exposed several important misunderstandings on the part of both an account owner and her administrator.

What's Wrong with This Feedback?

This respondent wrote the following:

"I always feel that they [Health Savings Accounts] are so restricted. They have to be at a certain bank with a specific (VERY) low interest rate and then you have to justify each expenditure to an uninformed bank teller. This limits the choices the person with the HSA can make to products they might not like. Of course, I feel the same way about 529 plans and a couple other products. In summary, an informed consumer who is going to shop for medical care will also shop for the best place for short term investments, perhaps by-passing the HSA."

What gives?

Different Administrators

It appears that she's opened a Health Savings Account with a community bank, a savings and loan institution, or a credit union. Thousands of smaller institutions offer Health Savings Accounts, and they attract owners who do their personal banking there or whose companies use that institution for their corporate accounts. These institutions wrap the proper paperwork around a standard checking account (a Health Savings Account is little more than a checking account with tax advantages and usually some investment options).

Her complaints - which we address below - are uncommon at larger banks, third-party administrators, and other institutions with which most companies contract to provide Health Savings Accounts to their employees.

"They Have to Be at a Certain Bank"

Health Savings Account owners can open an account with any account provider. In most cases, employers partner with a single provider and require employees to establish an account there if they want to receive employer contributions or fund t heir account through pre-tax payroll deductions. In these cases, employees must open an account there if they want to enjoy those benefits.

But HSA-eligible employees can open an account with any Health Savings Account provider that allows individual enrollment (as opposed to working only with partner companies' employees). Even if employees must open an account with your employer's partner to receive their full tax benefit on deposits, they can open a second account and move balances regularly into the second Health Savings Account that presumably has features that they prefer.

No one is locked into doing business with one Health Savings Account provider.

"A Specific (VERY) Low Interest Rate"

Yes, most Health Savings Accounts pay a market interest rate on deposits. These interest rates are very close to zero in the current market, whether the account is a checking or savings account, certificate of deposit, or Health Savings Account. Owners can shop for a better interest rate, but even account providers who offer tiered interest rates with higher rates for larger balances rarely pay as much as 1% on balances of $10,000 or more.

Thus, this criticism is valid. But collecting interest is only one way of building balances, as we'll explore in a moment.

"Justify Each Expenditure to an Uninformed Bank Teller"

It's not possible to tell whether this respondent is misinformed or the institution really is requiring documentation to show that each withdrawal request is for a qualified expense. If it's the latter, the institution isn't administering the account in compliance with federal tax law.

The first comprehensive Health Savings Account guidance (IRS Notice 2004-50, published in August 2004) makes this point clearly (Q&A 79): The HSA trust or custodial agreement may not contain a provision that restricts HSA distributions to pay or reimburse only the account beneficiary’s qualified medical expenses. Thus, the account beneficiary is entitled to distributions for any purpose and distributions may be used to pay or reimburse qualified medical expenses or for other nonmedical expenditures. Only the account beneficiary may determine how the HSA distributions will be used.

Neither the account provider nor an employer may restrict distributions to qualified expenses. That's because owners can make withdrawals for any purpose (subject to taxes and penalties for nonqualified expenses). And owners can match a distribution for a nonqualified expense with a qualified expense that they didn't reimburse from the account (say, withdrawing $300 to buy a plane ticket and pairing that expense with a $300 bill for a physician visit and lab work) to avoid taxes and penalties.

"This Limits the Choices the Person with the HSA Can Make"

We've already debunked this misunderstanding. Anyone who's eligible to fund a Health Savings Account (or who is no longer eligible but has a balance in an existing account) can open a second account and transfer balances from an existing account and/or maintain multiple accounts. The owner can find a new account with an investment menu that meets her requirements.

"An Informed . . . Consumer . . . Will . . . Shop for . . . Investments"

Again, owners aren't restricted to their current Health Savings Account provider for investments, even when their company selects a single provider with which to work. Owners who have a balance in an existing Health Savings Account can move balances from one account to another, whether or not they are eligible to fund an account. The issue here is this respondent's lack of awareness of her options, not a fundamental flaw in the design of the program.

The Bottom Line

Health Savings Accounts, like all other financial instruments, involve trade-offs. Their key features - tax savings and wealth accumulation, as examples - are attractive to many Americans. Their drawbacks - notably, compliance responsibilities placed on owners - may make them unattractive to some people who are willing to walk away from potential financial benefits to simplify their lives. But it's important to identify which stated disadvantages are inherent in the design of the Health Savings Account program and which are mistaken beliefs about the program.

Mike Harrington

I show C-Level Executives why their group disability coverage is inadequate and how to enhance it. I then implement the solution - Guaranteed Issue Disability & Life Insurance programs for white collar companies.

2y

" They pointed out that an owner must be enrolled in a high deductible health plan to fund a Health Savings Account and thus must pay at least $1,400 (self-only contract) or $2,800 (family plan). They noted that administrators often charge a nominal monthly fee to maintain these accounts. All true." That is a quote from the article. "Must pay" is not true at all. Must pay what? It implies you have to spend money in order to have a HSA qualified health plan. The 1400/2800 is the minimum deductible for a high deductible plan, it doesn't mean you have to spend that amount. I have not paid a penny on medical expenses since 2018.

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William G. (Bill) Stuart

Nationally recognized expert on reimbursement account strategy and compliance, particularly Health Savings Accounts and ICHRAs 🔹Writer🔹Author🔹Speaker🔹Educator🔹Strategist

2y

Mark Twain said it best: "It ain't what you know that gets you into trouble. It's what you know that just ain't true." And so it is with Health Savings Accounts. People often have false beliefs about these accounts that they spread like a virus. Here are some good examples of misinformation and the appropriate corrections.

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