Last week’s mail started the avalanche of end of year statements and one of the first to arrive was my HSA statement.
I am lucky to be in pretty good health so I don’t mind having a high-deductible health plan. As a result, I also get to watch my HSA (health savings account) continue to build up year after year so this is one statement I usually look forward to opening.
But this past statement didn’t show much growth beyond the actual contributions and to make matters worse, there was a $2 monthly service fee that had been eating into the little bit of interest that had been posted. Since my employer funds a significant portion of my annual HSA contribution, I didn’t have a choice as to who the HSA plan custodian was when the account was opened. When we had switched to the HSA and high-deductible health plan a few years ago, a local credit union had wooed us with an easy-to-manage employer-funded HSA and even waived the account fee for the first 12 months.
Fees can cut into the balance
In year two, the credit union began to impose the monthly fee but they were paying close to 2 percent interest and that was enough to more than offset the $2 a month with my ever-growing balance. However, with interest rates continuing to fall, the credit union has recently dropped their interest rate to a paltry .25 percent so now the monthly fee has become much more than just a nuisance.
To make matters even worse, when I called the credit union to voice my discontent, they informed me that the fee would be going even higher to $2.50 for 2012. So, are my co-workers and I stuck with this situation?
Many employees are unaware that the money in an HSA is totally portable and can be rolled to any financial institution that offers an HSA. Because the HSA is typically paired with a group health insurance plan, workers commonly assume that they have no choice where the HSA is established and go with the default custodian their employer has appointed.
Unfortunately, this can be a costly mistake.
Many health insurance companies that offer a qualified high-deductible health plan have partnered with financial institutions that offer the health savings account and are paid a referral fee so these arrangements don’t offer much value to the employees themselves. In fact, these arrangements can come with costly fees, including set-up fees, maintenance fees and sometimes even transaction fees. These charges can be significant so it pays to compare, as I have found myself in doing research on some of the HSA alternatives if I rolled my funds from the credit union. I even found a few financial institutions that offer varying investment options, including no-load mutual funds.
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A low-yield account limits growth
With the 2012 contribution limits now increased to $3,100 for individuals and $6,250 for families, having the ability to invest any excess funds in a growth mutual fund could make a big difference.
Let’s assume a 30-year-old single employee maxes their HSA contribution at today’s limits but uses roughly half of their HSA balance each year for out-of-pocket medical costs with the remainder invested in a mutual fund that has an average long-term return of 7 percent. At 65, their HSA balance could be over $214,000.
But, if the HSA funds remain in a low yielding savings account of 1 percent, then the balance at 65 would only be about $65,000. Even the monthly maintenance fee can make a difference over time, with a $2 a month fee costing a potential $3,300 in actual fees and loss of growth on those funds over a 35 year timeframe.
So take a look at your employer-sponsored HSA, is it time for change?
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.