Six Good Reasons Not to Open an HSA? Seriously?

There are some valid reasons to think twice about opening and funding a Health Savings Account. The six points made in this article aren't among them.

I recently read an article entitled 6 Reasons Why You Should Think Twice Before Opening an HSA. Articles that tell potential Health Savings Account owners to pause before opening and funding an account are by far the minority among articles offering advice. They catch my attention, which was the intent of the author.

There may be some good reasons to consider carefully venturing into the world of Health Savings Accounts, and I'll offer some in next week's HSA Wednesday Wisdom column. But the six listed in this article generally fall flat in making the case. One imagines a lawyer grasping at straws to defend a client who was caught red-handed.

After reading the article, my first reaction was to mutter the words that we in my family often speak when we're exposed to information that raises our eyebrows. That phrase: "You serious, Clark?"

Let's analyze the six reasons to think twice about opening a Health Savings Account:

1. You Must Enroll in a High-Deductible Health Plan

This point is valid. But the deductible can be as low as $1,500 for self-only and $3,000 for family coverage (increasing to $1,600 and $3,200 for plans that renew in 2024). That's far less than the average deductible of about $2,500 for self-only coverage among the 85% or more of workers in companies with fewer than 200 employees who are covered by deductible plans (see figure 7.3 here). And it's well below the average combined (self-only and family figures blended into a single average) deductibles on Silver ($4,890) and Bronze ($7,481) plans - the most popular options - in federal-facilitated marketplaces (see Figure 2 on Slide 3 here).

Analysis: Nearly everyone - whether buying coverage through an employer, in the nongroup market, or via Medicare (the Part A deductible for inpatient care is $1,600 per hospitalization) pays a deductible higher than the statutory minimum for an HSA-qualified plan. This is hardly a drawback to a Health Savings Account program. Note: The article does concede that premiums are lower when deductibles are higher, as any buyer of collision coverage on auto insurance or of homeowner's insurance knows.

2. Limited Access to Funds

The article notes that the tax benefits of funding a Health Savings Account are tied to using those balances for qualified expenses only. If you withdraw funds for another purpose - say, to repair a car or major appliance or to take a cruise along the Mississippi River - your distribution is subject to income taxes and usually a 20% penalty. Thus, Health Savings Account balances are a poor - and expensive - source of emergency funds.

Analysis: No kidding. Every tax-advantaged account - retirement savings accounts, educational savings accounts, dependent-care FSAs - either prohibits withdrawals for non-qualified expenses or impose taxes and penalties on such withdrawals. No one suggests that Americans place their emergency savings exclusively in any of these accounts.

3. Opportunity Costs of Locked-in Savings

The author writes that people with few qualified expenses probably shouldn't lock their savings into an account whose tax benefits are lost when the funds are ultimately not spent on qualified medical expenses.

Analysis: True. But Health Savings Account owners can adjust their contributions month-to-month and year-to-year to meet their medical expenses. They can increase or decrease contributions based on their actual or projected expenses. Also, looking longer-term, Fidelity estimates that a couple retiring at age 65 this year will spend about $315,000 on qualified medical expenses (Medicare premiums, Medicare cost-sharing, and services - like most dental, vision, and hearing care - not covered by Medicare).

4. Administrative Fees and Complexity

Yes, many administrators impose a monthly account fee. And the rules around who's eligible to fund a Health Savings Account, the contribution limits, and the range of qualified expenses can seem complex to the newcomer or even the more experienced owner with little experience in other tax-advantaged programs.

Analysis: Employers often pay this fee for employees participating in the company's Health Savings Account program. There are many administrators that offer a no-fee Health Savings Account (I've owned one for years). And although the rules are complicated, it's easy for owners to quickly master about 90% of what they need to know, perhaps with the help of their employer or account administrator.

5. Limited Investment Options

The article points out that investment options are often limited compared to a traditional brokerage account. This shortcoming affects long-term returns.

Analysis: Most Health Savings Account owners have access to a range of investment options that includes at least a couple dozen mutual funds that allow owners to construct a diversified portfolio. Sure, that number isn't as large as a brokerage account. But it's not unusual for employer-sponsored retirement plans to offer a select portfolio so that employees don't suffer from paralysis by analysis - not investing because they're overwhelmed by hundreds of funds, many of which are duplicative. Every Health Savings Account owner - even one required to open an account with an employer's preferred partner to facilitate employer and employee payroll contributions - can open an account with any administrator or trustee (and move money regularly from one Health Savings Account into their preferred account). My primary Health Savings Account offers a full brokerage platform, allowing me to choose from among all mutual funds, EFTs, stocks, and bonds.

6. Risk of Losing Unused Funds

Finally, the article points out that although Health Savings Account owners don't face the use-it-or-lose-it issue that Health FSA participants must manage, it's possible to overfund a Health Savings Account and not be able to spend the balance in retirement.

Analysis: Let's create a wildly optimistic example. You fund a Health Savings Account for 45 years. You start with a $5,000 annual contribution and increase it by $100 annually, earning a 6% return every year. At the end of 45 years, your balance is $1.384 million. That's a lot higher than Fidelity's projection of $315,000 of qualified expenses in retirement. But that figure is for this year's retirees. If it increases by an average of 3.5% for 45 years, it grows to $1.431 million - or about $50,000 more than your savings.

In other words, it's extremely difficult to build a Health Savings Account balance greater than your total lifetime qualified expenses. And if you do, the funds aren't lost. You name a beneficiary who either receives the balance intact as a health Savings Account (your spouse is your beneficiary) or the liquidated balance with a possible income-tax liability but no restrictions on how the remainder is spent.

Are There Sound Reasons Not to Fund a Health Savings Account?

Yes. We'll explore this topic in next week's HSA Wednesday Wisdom column.

The Bottom Line

High deductibles are the norm for Americans today, whether they're covered by group plans, nongroup plans, or Medicare. The question is whether those plans are designed so that employees (non-employees and Medicare enrollees aren't HSA-eligible) can offset their out-of-pocket and other qualified medical expenses with pre-tax dollars through a personal tax-perfect account (a Health Savings Account) or pay full price for these services. Viewed in this context, Health Savings Accounts provide a financial benefit to most Americans eligible to open and fund one.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.