Health savings accounts (HSAs) have been around for years, and most advisors are already familiar with the valuable triple tax break that these accounts offer.
Despite this, many individuals who have access to an HSA savings option either fail to maximize contributions to the account or simply fail to take steps to allow the HSA to reach its full potential as an investment vehicle. Using an HSA for its obvious tax benefits is only the first step to ensuring that the account lives up to its full potential, especially with respect to lower and middle-income clients. In order to make HSAs attractive to these clients, it’s important to examine the fine print on the account and, often, take proactive steps to ensure that the client is making the most of every HSA dollar.
HSAs: Common Mishaps
HSA funds can be withdrawn tax-free if they are used to cover qualified medical expenses (which is an expansively defined term that covers a myriad of expenses), so clients can maximize the tax-preferred treatment of the HSA if the funds are eventually spent on qualified medical expenses. Despite this, there is actually no requirement that HSA funds be withdrawn for this purpose. This, coupled with the fact that the funds do not expire at year-end, makes an HSA a valuable investment vehicle.
However, for the lower income client, it is important to pay close attention to the fees and expenses associated with the HSA. Many employer-sponsored HSAs charge a setup fee, as well as maintenance and transaction fees. Maintenance fees can vary and are typically flat fees charged regardless of the account value (either monthly or annually). Transaction fees are fees that are charged each time the client withdraws funds from the HSA to cover qualified medical expenses.
In many cases, the fees charged by an employer-provided HSA can be high, so that even if the client does not incur medical expenses and can allow the account funds to grow, the investment value of the account is reduced.
Some HSAs simply do not offer investment choices that appeal to the client, or offer choices with high investment-related expenses that a client with limited funds would ideally avoid—meaning that the client should be advised to pursue other options in order to maximize the value of the HSA.
Steps to Maximize HSA Value
Clients who find themselves faced with a less-than-ideal employer-provided HSA option should be aware that they can simply roll those HSA funds into any other HSA of their choosing—there are no limits on the amount of HSA funds that can be transferred into another HSA in a trustee-to-trustee transfer, and the client can transfer funds as often as he or she wishes.