Health savings account (HSA) custodians include credit unions, banks, insurance firms, and other IRS-approved financial organizations. These institutions, called HSA administrators, secure HSA funds. Account holders, in some instances, have the liberty to decide how these funds are invested and have the option to utilize them for eligible medical expenses.

How to Open an HSA Account

One standard route to establish an HSA is through your workplace. Here, you may find that a specific HSA custodian is designated for you, but you always have the freedom to explore other options. However, before making any changes, discussing with your HR team how a change might influence direct deductions meant for your HSA from your salary is wise.

When you decide to set up an HSA independently, the choice of a custodian rests solely with you. This decision is crucial because factors like interest rates, associated fees, and available investment options can play a substantial role in determining the growth of your HSA funds over the years.

Reduce expenditures and increase profits to improve your financial path. Having your cash holdings and investments insured by the FDIC and SIPC is also important. Remember, an HSA differs from a flexible spending account (FSA). The latter is set up by employers, permitting employees to use pretax earnings for covering qualified healthcare costs.

The Role of HSA Custodians

The 2003 Medicare Prescription Drug, Improvement, and Modernization Act established health savings accounts. It aimed to give HDHP holders a tax-advantaged way to pay for healthcare.

HSA custodians play a pivotal role in this ecosystem. They enable individuals to funnel funds into their HSAs and utilize them when medical bills arise. Consider it a specialized savings account where custodians reward holders with interest on the maintained balance. Furthermore, some institutions offer the option of investing in diverse avenues like stocks, bonds, or mutual funds, allowing individuals to potentially amplify their returns on funds not immediately needed for medical costs.

HSA Custodian Expenses

Every HSA custodian will have associated fees for maintaining and operating health savings accounts. The kind and amount of these fees largely depend on the specific institution you’re dealing with. Commonly encountered charges include an annual management fee and a periodic custodial fee that might be a fraction of your total account funds. Additionally, you might be slapped with an excess contribution penalty if there's any discrepancy, like over-contributing beyond the IRS-set limits for HSA accounts.

Single HSA policyholders can contribute $3,650 in 2022 and $3,850 in 2023. Family coverage limits will rise from $7,300 in 2022 to $7,750 in 2023. Over-55s receive $1,000 more.

Other miscellaneous charges can arise from needing extra debit cards for family members, replacing misplaced cards, and additional fees that are standard for typical bank accounts - think insufficient funds, account termination, or putting a stop on payments.

The Interest Play in HSAs

HSA custodians often vary in how they reward interest. Some offer a uniform rate irrespective of the balance, while others operate on a tiered system. Annual interest rates can be as low as 0.05% for accounts between $0 and $2,499.99. Balances between $2,500 and $4,999.99 may suffer a 0.1% fee, while those exceeding $5,000 may pay 0.2%. Make sure your banking institution is FDIC-insured if it holds your HSA.

However, like most conventional bank accounts, HSA custodians usually don't offer interest rates substantial enough to combat inflation, even if you're on the highest interest tier. To amplify your earnings, consider investing a portion of your funds that aren't immediately required for medical expenses.

Smart HSA Contribution Tips

If your employer selects your current HSA custodian, which is different from your liking, you can switch. But, two compelling reasons might make you think twice before making that move: the lure of matching contributions and potential tax HSA benefits.

Suppose your employer matches your contributions to your HSA insurance. In that case, a smarter move might be to maintain the default account they've provided and then open an additional HSA with your chosen institution. Periodically, you can transfer funds from the first account to the second. Remember, employers typically contribute only to their default HSAs, and paying attention to this would mean missing out on potential free money. These matched amounts are also devoid of income, Social Security, and Medicare (FICA) taxes. If your contributions are made pre-tax via salary deductions, they diminish your taxable gross income, benefiting you on federal and state tax fronts.

Manual contributions are still possible for self-employed individuals or those without the convenience of automatic HSA contributions. While you'd be using post-tax money, you can still claim these as deductions, thereby adjusting your gross income on your annual tax return using Form 1040. Remember to attach IRS form 8889 for Health Savings Accounts to indicate your deduction computation. However, the benefit of FICA tax savings, which comes with automatic deductions, will not be applicable in this scenario.

Example of HSA Custodian

Fidelity is a well-known financial institution that acts as an HSA custodian. They offer health savings accounts for individuals, helping them set aside funds for qualified medical expenses. With Fidelity, account holders not only have the opportunity to save for immediate healthcare costs but can also invest their HSA balances in a range of investment options to potentially grow their savings over time. Additionally, Fidelity provides a suite of online tools and resources to help individuals manage and optimize their HSA investments. By choosing an established custodian like Fidelity, one can benefit from both the healthcare and financial advantages that HSAs offer.

Bottom Line

Like opening a checking, savings, or brokerage account, selecting a custodian for your HSA is simple. Finding a good HSA administrator means finding one with cheap fees (particularly for recurring charges like maintenance and custodial fees), high rates of interest for short-term and cash accounts, and low-cost investment alternatives for long-term balances.

The custodian should offer standard account protections like SIPC or FDIC insurance and a user-friendly website. You may get started with the help of online resources like HSA Search.