A Health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP).  The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), HSA funds roll over and accumulate year to year if not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans. HSA funds may currently be used to pay for qualified medical expenses at any time without federal tax liability or penalty. Beginning in early 2011 OTC (over the counter) medications cannot be paid with HSA dollars without a doctor’s prescription.  Withdrawals for non-medical expenses are treated very similarly to those in an individual retirement account (IRA) in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier. These accounts are a component of consumer-driven health care.

Flexible Spending Plans

A flexible spending account (FSA), also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria  plan of an employer in the United States.  An FSA allows an employee to set aside a portion of earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes, resulting in substantial payroll tax savings.   Before the Patient Protection and Affordable Care Act, one significant disadvantage to using an FSA was that funds not used by the end of the plan year were forfeited to the employer, known as the “use it or lose it” rule. Under the terms of the Affordable Care Act, a plan may permit an employee to carry over up to $500 into the following year without losing the funds.

The most common type of flexible spending account, the medical expense FSA (also medical FSA or health FSA), is similar to a health savings account (HSA) or a health reimbursement account (HRA). However, while HSAs and HRAs are almost exclusively used as components of a consumer-driven health care plan, medical FSAs are commonly offered with more traditional health plans as well. In addition, funds in an HSA are not lost when the plan year is over, unlike funds in an FSA. Paper forms or an FSA debit card, also known as a Flexcard, may be used to access the account funds.

HSA Strategy

With the advent of the Affordable Care Act and other qualifying high deductible health plans offered in the marketplace, the HSA can be a good fit for many individuals and families.

Tax-free (pre-tax) contributions and withdrawals for qualified medical expenses, employer contributions, and growth through investments can be very satisfying for employers and employees.

Unlike FSAs, HAS account contributions roll over from year-to-year, and are portable if you change jobs or to self-employment.  You own your HSA account. If you do not use the HSA fund balance, you can withdraw the funds in retirement for any use without penalty beginning at age 65.

Although there are unlimited HSA account administrators, below are some reputable and very competitively priced administrators that provide for investment of the accounts to offer greater returns on the accounts.

 

HSA Administrator Annual or Maintenance Fees Setup Fees Other Fees Investment Options
HSA Bank Monthly account maintenance fee: $2.50 (waived on daily HSA balances of $5,000 or more) No HSA Bank fees Self-directed through TD Ameritrade. Trading fees apply. Or, pre-selected funds with no trading fees ($24 annual fee).
Health Savings Administrators Annual administration fee: $45.00.
Custodial fee: 6.25 basis points per quarter (i.e, $0.625 per $1,000 every three months) with no cap.
No Health Savings Administrators fees Choice of 22 Vanguard Funds.
Health Equity Monthly account maintenance fee: paid by sponsor or up to $3.95 No Health Equity fees Choice of 43 mutual funds. No purchase fee.
Select Account Monthly maintenance fee: $0-4/mo. Plans vary. No Select Account HSA fees Fee of $1.50 per account per month for 26 funds: Select Account investment options when balance exceeds $1,000. If balance > $10,000, you can open a self-directed brokerage account with Charles Schwab.
Alliant Credit Union None with basic account. Investment account monthly fee: $5.95 No Alliant Credit Union HSA fees 0.65% dividend rate, or choose from 125 mutual funds in aself-managed brokerage account at a $5.95/month fee.
Wells Fargo HSA Monthly maintenance fee: $4.25 (waived if the combined deposit and investment balance in your HSA on the last day of the month is greater than or equal to $5,000) Not if done online, otherwise $10 Wells Fargo HSA fees Choice of 25 funds (mostly Wells Fargo).