Health savings account

A  (HSA) is a special account which is used in conjunction with a high deductible health plan. Contributions to the account are tax-deductible on the federal and most state tax returns, and withdrawals are tax-free if they are used for medical expenses. Unlike a flexible spending account, unused money remains in the account and can be invested; most accounts offer either mutual funds or brokerage accounts for investing.

Basic HSA rules
You are only eligible to contribute to an HSA if your only health insurance is a qualified high deductible health plan, although you can continue to use and withdraw from the HSA once you are no longer eligible to contribute. Unlike most health insurance, the high deductible health plan pays nothing except for preventive care until you meet a fairly high deductible. The plan may make its own contribution to the HSA in order to reduce your potential out-of-pocket costs.

Tax considerations
Unlike many other tax deductions, there are no income restrictions to contribute to an HSA. Contributions to an HSA reduce your federal adjusted gross income (AGI) dollar for dollar, possibly making you eligible for income-based credits or Roth IRA contributions you would not otherwise be eligible for without the HSA deduction.

If your employer allows it, you can make your own contributions through pre-tax payroll deduction; this has the potential advantage that these contributions, like pre-tax insurance premiums, are not subject to Social Security and Medicare taxes, so long as the plan is classified as a Section 125 or "cafeteria" plan. Often, if you are below the Social Security wage base, it is only break-even or worse to use the payroll deduction because the reduced Social Security benefits cost more than the tax savings.

State taxation of HSAs
While contributions are deductible on one's federal income tax, this is not always true for state income tax. The following states are not in conformity with federal legislation and do not recognize HSAs, so contributions are not deductible and earnings are taxable:


 * California
 * New Jersey

If you live in a state which taxes HSA earnings, consider investing the HSA in Treasury bonds or TIPS, which are exempt from state taxes. (In CA, capital gains issued by a TIPS/Treasury mutual fund or capital gain/loss on the sale of Treasury mutual fund shares would be subject to state taxes, but even if they are, most of the returns from Treasury bonds and TIPS would be income which is not subject to state tax. NJ exempts capital gains on Treasuries from state tax.)

In states that tax contributions, be aware that Federal tax-free rollovers into an HSA, such as the once in a lifetime IRA to HSA rollover, and an Archer MSA to HSA rollover, are treated as a non-qualified withdrawal from the IRA/MSA at the state level and subject to income taxes and penalties on the state return. Also in states that tax contributions, the state treats the HSA as a taxable account, taxable investing rules apply.

Principles of tax-efficient fund placement are important, except when investing in TIPS and treasury bonds (as noted above) and tax loss harvesting is possible on the state tax return if you have capital gains or the state allows carryovers of capital losses. HSA administrators are not required to send you tax forms (such as 1099-INT, -B) by the IRS, so you are required to keep good records, track the state cost basis manually, and report HSA gains/losses on your state tax return. You may be able to include amounts paid from the HSA for medical expenses as an itemized deduction on the state tax return, subject to AGI floors.

If you move from a state which does not tax HSAs to a state which taxes HSAs, sell any holdings with capital gains before you move, so that you will not pay taxes on the same capital gains when you sell the same holdings later as a resident of the state. You can buy back the same or similar holdings immediately after selling.

Contribution limits
The 2018 annual IRS limit for an individual plan is $3,450 and $6,900 for a family plan, plus $1,000 catch-up contributions if you are at least 55. The 2019 limit is $3,500 for an individual plan and $7000 for a family plan. If you are enrolled in a HDHP for only part of the year, the maximum contribution amounts can vary based on several factors; see IRS Pub 969 for specifics.

Contribution limits include both contributions from the HSA participant as well as employer contributions, if those made by the employer that are excludable from income.

Withdrawals
Withdrawals for qualified medical expenses (as outlined in IRS Publication 502, Medical and Dental Expenses) are tax-free. As long as you keep proper records, you can even reimburse yourself in a later year for medical expenses which you paid out of pocket after you established the HSA (see Q39 in IRS Notice 2004-50).

Withdrawals to pay for some types of medical insurance premiums are also tax-free. As detailed in Internal Revenue Bulletin 2004-2 (January 12, 2004) - Health Savings Accounts, you can use HSA funds to pay for qualified long-term care insurance (but only up to IRS specified dollar amounts), COBRA health care continuation coverage, and health care coverage while an individual is receiving unemployment compensation. Furthermore, once reaching age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance can be paid from an HSA. Premiums for Medigap policies are not qualified medical expenses and therefore can't be paid tax-free from an HSA.

Withdrawals for other purposes are taxed at your full tax rate, with an extra 20% penalty. The penalty is waived if you are at least 65 or disabled.

Rollovers/Transfers
You can make a once in a lifetime rollover or transfer from an IRA to an HSA up to the annual HSA funding limit. This is usually not advised since you would lose the ability to contribute and take an HSA tax deduction for the amount you transfer, but it can be an emergency source of funds without paying taxes or penalties. See IRS Notice 2008-51.

You can rollover an Archer MSA to an HSA as stated in [http://www.irs.gov/pub/irs-pdf/p969.pdf IRS Pub. 969] page 6.

Also it is not advised if you live in a state that taxes HSA contributions to do either of these rollovers, due to incurring state taxes and penalties.

You are able to move money between HSA custodians through direct rollovers and trustee to trustee transfers - see [http://www.irs.gov/pub/irs-pdf/p969.pdf IRS Pub. 969 page 6]. The rules are exactly the same as IRA Rollovers and Transfers. You may want to do this annually if you contribute to a plan through your employer's payroll deduction to gain the social security and medicare payroll tax exemption, but you don't want to leave the funds there long-term if the investment options are not good. The HSA custodian(s) may charge a fee for a trustee-to-trustee transfer; direct rollovers can usually be done without a fee.

Medicare
Social Security recipients 65 years of age or older will be automatically enrolled in Medicare Part A and therefore ineligible to contribute to a Health Savings Account.

Contributions to your HSA stop must stop when you enroll in Medicare. However, you may use money that’s already in your HSA after you enroll in Medicare to help pay for deductibles, premiums, copayments, or coinsurance.

Premium-free Part A coverage begins 6 months back from the date you apply for Medicare (or Social Security/RRB benefits), but no earlier than the first month you were eligible for Medicare. To avoid a tax penalty, you should stop contributing to your HSA at least 6 months before you apply for Medicare. To say this another way: If you start Social Security or enroll in Medicare before age 65-1/2, you only have to stop contributing to an HSA for the month prior to Medicare eligibility.

If you contribute to your HSA after your Medicare coverage starts, you may have to pay a tax penalty. Generally, you must pay a 6% excise tax on excess contributions. The excise tax applies to each tax year the excess contribution remains in the account.

Death of HSA Holder
An HSA can be inherited by a spouse beneficiary. Any other beneficiary will receive the HSA as a taxable distribution. See linked section for more details.

How the account operates
The HSA custodian is a bank, and the account initially works like a bank account; you can make deposits, and withdraw money with checks or a debit card. Once you have enough money in the account, the bank allows you to link the account to a mutual fund or brokerage account; you still write checks against the bank account, and must transfer money to the bank account in order to use it.

You can choose your custodian, and transfer accounts between different custodians. However, if your health plan or employer makes a contribution, it may select the custodian to which it makes contributions, and may offer other incentives such as waiving service fees.

How to use the plan
There are two ways to use the HSA; you can either pay all your medical expenses from it, or pay out of pocket and save the plan money for medical expenses in retirement. Even if you use the HSA to pay current expenses, you will likely accumulate more than you spend, and can invest the remainder for medical expenses in retirement.

Paying current expenses from the HSA
If you are not maxing out your retirement accounts, you should usually pay current expenses from the HSA. If you are in a 25% tax bracket and have $1,000 in medical bills, taking $1,000 from the HSA, and taking advantage of the fact that this wasn't an out-of-pocket expense so that you can invest an extra $1,000 in your Roth IRA or $1,333 in your 401(k), works to your benefit.

If you kept the $1,000 in the HSA and paid the expense out of pocket, you would have the right to withdraw $1,000 from the HSA later to cover the expense and spend $1,000 on anything later. But if you invested the $1,000 in a Roth IRA, you gained the right to spend not only that $1,000 on anything in retirement, but also the gains on that $1,000; if you invested $1,333 in a 401(k), that is just as good after adjusting for the 25% tax you will pay in retirement.

Because of the tax deduction, you should invest in the HSA in preference to any other retirement savings except for a contribution matched by your employer. If you are in a 25% tax bracket, $1,000 invested in your 401(k) costs you $750 out of pocket, but you will lose much of the money to taxes when you withdraw it. $1,000 invested in the HSA costs the same $750 out of pocket but can be spent tax-free as long as it is used for medical expenses.

In addition, HSA contributions via employer payroll deduction are exempt from FICA taxes, where 401(k) contributions are not.

If you are too healthy in retirement and can't use the HSA for medical expenses (even past ones), the non-medical portion is still as good as a traditional IRA once you are age 65.

Paying current expenses out of pocket
If you are maxing out your retirement accounts, you should treat the HSA as an opportunity for further savings, like an IRA, and not withdraw from it until you retire. If you have $1,000 in medical bills, paying them from your taxable account leaves the $1,000 in the HSA to grow tax-free (and keeps the right to withdraw $1,000 tax-free in a future year), while paying them from the HSA leaves $1,000 in your taxable account, which will grow subject to taxes since you do not have any room for tax-sheltered contributions.

Once you are retired, you can withdraw from the HSA an amount equal to your past medical expenses plus any current expenses tax-free, and withdraw from your other accounts for non-medical expenses. HSAs can be used to pay medicare premiums and other medical expenses in retirement.

How to invest the HSA
If you are paying current expenses out of pocket, the HSA is intended for medical expenses in retirement. You should thus invest it as if it were part of your IRA or 401(k), as those accounts are also invested for retirement expenses. If you are using the HSA for current expenses, at least one year's deductible should be considered part of your emergency fund since it is likely you will need this amount for medical bills; the remainder can be invested as if it were part of an IRA or 401(k).

If you view the HSA as part of your retirement allocation, you can then choose which part should be held in the HSA, and which should be held elsewhere. If you live in a state that does not recognize HSAs, state taxes give a strong incentive to hold Treasury bonds or TIPS there. Otherwise, the investment options in the HSA and in other accounts may determine what is better to hold in which account; if your 401(k) has better bond than stock options, you would hold bonds there and stocks in your IRA and HSA.

Since an HSA inherited by a non-spouse beneficiary becomes fully taxable, it is best to leave other investments to heirs in preference to the HSA. If you have a large HSA which might exceed your medical expenses, this is a minor incentive to hold bonds rather than stocks, as it reduces the risk that the HSA will grow too large. Another solution is to name a charity as the beneficiary of the HSA, if you were planning to leave some of your estate to charity.

Spouse beneficiary
Per IRS Pub 969, upon the death of the holder of an HSA, a surviving spouse may assume the HSA as his or her own if the spouse is the beneficiary. Although ambiguity exists on this point, it is believed by knowledgable Bogleheads that a surviving spouse HSA beneficiary is permitted to reimburse qualified medical expenses of his or her deceased spouse after assuming ownership of the HSA, free of taxes.

Non-spouse beneficiary
The rules for a non-spouse beneficiary, however, are more complicated.

Per Pub 969, when the HSA account holder dies, "the account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. If your estate is the beneficiary, the value is included on your final income tax return. The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death."

See the linked referenced above for more clarification on the above terms from Pub 969. Although there is some ambiguity regarding the language around payment of the decedent's medical expenses, one matter appears to be clear: unlike an inherited IRA, an inherited HSA (to a non-spouse) ceases to become a tax-advantaged account, and it appears that reimbursable medical expenses of the decedent that had not been reimbursed no longer can be reimbursed (although unpaid expenses can still be paid and deducted). Hence, from an estate planning perspective, an HSA has no more value to a non-spouse beneficiary than an equal amount of taxable income, and much less value than an equal amount of cash. Therefore an HSA holder should carefully balance the desire to leave HSA funds un-reimbursed in order to compound tax-free, versus leaving behind substantial HSA balances being inherited with significant undistributed tax-free amounts. Even for a spouse HSA beneficiary, it is unclear whether the surviving spouse (who becomes the HSA holder) may distribute the undistributed expenses of the decedent.

In light of these inheritance disadvantages, "Those with both Roth IRA accounts and HSA accounts with unreimbursed qualified medical expenses, should distribute those tax-free HSA dollars before touching the Roth accounts. Also, upon turning 65 they should make distributions for Medicare Part B premiums, and other qualified medical expenses (co-pay, co-insurance, dental, vision. etc...). Tax-free HSA dollars should always be spent before Roth dollars." If you wish to continue to enjoy the tax-free compounding benefits of the HSA, but want to ensure that the balance does not become taxable income upon death, then consider the following advice: "'To minimize this potential tax liability, as with retirement benefits, HSA owners may wish to consider naming a charitable beneficiary or name a low-income tax bracket beneficiary to receive the taxable income that is accelerated by death.'" According to Helen Modly, CFP, CPWA and Tommie Monez, MBA, CFP, ChFC, in a Morningstar article: "'There is a good case for allowing the HSA balances to grow as a cushion for high medical expenses later in life, but consideration should also be given to the inheritance tax disadvantage. Eventually using up the tax-free dollars for medical expenses or naming a charity as beneficiary can mitigate or eliminate the tax consequences.'"

Advantages
As with a flexible spending account, the HSA allows you to contribute tax-deductible dollars and spend them tax-free on medical costs. However, money in a flexible spending account is lost if not used within a grace period after the end of the year, so you can only use it for expected expenses and will pay unexpected medical expenses with after-tax dollars. The HSA allows you to pay all your expenses with pre-tax dollars as long as they fit within the HSA limit, and what is not used continues to roll over to following years.

If your employer gives a percentage subsidy on health insurance, the insurer's contribution to the HSA benefits from the same subsidy. For example, if your employer pays 75% of your health insurance, it costs you only $250 to receive benefits which cost the insurer $1,000, even if that $1,000 benefit is a contribution to your HSA.

Disadvantages
The main potential disadvantage of the HSA is not the account but the high-deductible plan which goes with it. If you have very low expenses, the high deductible doesn't matter; if you have very high medical costs, the plan must have a catastrophic maximum out-of-pocket cost which may also save you money. If your expenses are near the deductible, you may be better off without the HSA, using a conventional plan instead. HSAs are still relatively new in existence and are generally not available from major fund companies and often have maintenance fees.

Additionally, unlike IRAs, HSAs do not enjoy the same favorable tax treatment upon death of the HSA holder. See Inherited HSA for more.

HSA custodians and options
This list is not complete; please add others. Custodians are listed in alphabetical order.

Alliant Credit Union (HealthEquity)
Alliant Credit Union has no fees to open the account, no monthly or management fees, no transaction fees, free checks, free VISA debit card, no minimums, no fees to close the account. Alliant is ideal for a "cash" HSA to pay ongoing medical expenses or a starter HSA while you build towards an "investment" HSA. The HSA can be invested for a $5.95 monthly fee, with at least $1000 remaining in the cash account. Options include several Vanguard funds.

Note: Starting October 5, 2017, Alliant's HSA will be transitioned to HealthEquity. See this and Alliant HSAs now administered by HealthEquity.

BenefitWallet
BenefitWallet (formerly known as The ACS|BNY Mellon HSA Solution) is a HSA available only through employer plans. The HSA includes a low-interest savings account and an optional investment account. The savings account is the default account into which employer and employee contributions are deposited, and from which medical expenses are paid. A participant may also invest in a separate HSA investment account.

Investment Platform

To use the investment platform, the participant must have at least a $1,000 balance in the HSA savings account. Any balance over the $1,000 may be invested in one of approximately 27 mutual funds in a separate (but linked) investment account. Of interest to Boglehead investors are the following Vanguard index funds :


 * Total stock market index institutional
 * Total international stock market index admiral
 * Mid-cap index admiral
 * Small-cap index admiral
 * Total bond fund admiral.

All the other funds are high-expense actively managed funds. The funds in the HSA have the same expense ratios as retail investors would pay for the same funds.

Investment Platform

There is a $2.90 monthly fee to use the investment platform. Unlike some HSAs, there is no charge to make transfers or trades in the investment platform, only the monthly fee.

Savings Account - Interest Rate and Fees

BenefitWallet HSA is most commonly used by employers. Based on observations from multiple BenefitWallet participants, account management fees in the savings account portion of the HSA vary from one plan to the next, depending on the terms each employer was able to negotiate with BeneiftWallet.

Based on observation from BenefitWallet participants, some plans charge a $2.25 monthly fee if the balance is below $3,000, some plans charge a higher $3.25 fee for balances below $1,000, and some plans charge a monthly fee of $2.95 regardless of balance. Other participants may have different fee schedules. Therefore, each BenefitWallet participant needs to consult the fee schedule for their own specific plan. To see your own plan's fees and interest rate, log in to your account, and then go to BenefitWallet Health Savings Account Fee and Rate Schedule (this page is secured - log in to your account first and then click link).

BenefitWallet Tips

Contributions to the HSA (from employer and employee payroll deposits) are deposited initially into the savings account. From there, a participant may optionally transfer funds automatically or manually from the savings account (as long as the $1,000 minimum balance is maintained) into the investment platform, into specific fund(s). For the participant who wishes to use their HSA as an investment account, one useful feature with automatic investments is the ability to automatically transfer any balance over $1,000 (or any chosen amount) from the savings account into the investment platform; with this enabled, any incoming deposits (above the balance threshold you specify) into the savings account will transfer over to the investment platform the next trading day, for entirely "hands off" investing.

Closing a BenefitWallet HSA

See Bogleheads forum posts for personal experiences with transfers and rollovers out of BenefitWallet HSA into other custodians:

Elements Financial (Eli Lilly Federal Credit Union)
Formerly known as Eli Lilly Federal Credit Union, Elements Financial has no setup fees. A maintenance fee of $4/month applies for balances below $2,500. Access to TD Ameritrade is available only if your account balance at time of enrollment is at least $2,500. Transfers between your HSA and TD Ameritrade accounts are wire transactions and incur a $25 fee.

Fidelity
Fidelity offers HSAs for employers and, as of November 2018, individuals. Individual HSAs have no account opening or transaction fees. In a favorable review of the Fidelity HSA's features, the The Finance Buff wrote: "No other HSA provider comes close to what Fidelity offers."

Health Equity
Health Equity Includes many Vanguard index funds, along with a annual 0.396% fee on the balance (0.033% per month times 12 months).

Health Savings Administrators
Health Savings Administrators offers 22 Vanguard funds, including Admiral shares of most index funds. Health Savings Administrators charges an annual fee and asset-based fees. Fees

HSA Bank
HSA Bank has a TD Ameritrade brokerage option which offers commission-free trades on over 100 ETFs (excluding Vanguard ). A minimum balance must be maintained in cash at HSA Bank to avoid monthly fees. According to The Finance Buff on October 24, 2017, "HSA Bank and Elements Financial used to be good places for having a linked investment account for your HSA. Due to changes made by the investment account provider TD Ameritrade, the cost of using HSA Bank or Elements Financial increased quite a bit." HSA Bank Rates & Fees

Lively
Lively offers a TD Ameritrade brokerage account which offers commission-free trades on over 100 ETFs (excluding Vanguard). There is no fee to invest (beginning on January 1, 2019) ; prior to 2019, there was a $2.50 monthly fee but no minimum cash balance.

Optum Bank
Optum Bank Offers a suite of some 20 investment options, including Admiral shares of Vanguard's 500, mid-cap, and small-cap indexes. Monthly fee but no asset-based fee. Minimum $2,000 cash in order to invest, and you can't directly spend investment funds.

Saturna Capital
Saturna Capital offers a stand-alone brokerage account through Pershing. You do not need a separate bank account with the HSA. There is no monthly maintenance fee. Vanguard and Fidelity Spartan funds are available for $14.95 per trade. Saturna does not offer checks or HSA credit cards. Saturna Capital's brokerage account has a $10 surcharge for Vanguard funds, as well as other fund families. The list can be found here: FundVest Focus Fund Families

SelectAccount
SelectAccount offers two levels of investment options. Once a minimum of $1,000 in an HSA savings account is achieved, you can open a basic investment account. Vanguard and Fidelity funds are among the choices in the HSA Investment Options. Account balances above $10,000 may utilize a self-directed brokerage account with Charles Schwab. (You must keep at least $1,000 in the base balance of your HSA account.) Both investment options impose an $18/year management fee. Schwab's standard brokerage commission schedule applies to transactions in the self-directed brokerage account.

The Sterling HSA
The Sterling HSA offers full-service medical record keeping with the Standard Plan, and the ability to use any brokerage account which is willing to open an account in the name of "Sterling HSA for The Benefit of (account holder)"when using the eSavings Plan. Sterling HSA Fee Schedule (there is an additional $16 annual fee for using their brokerage). Vanguard will not setup an account in accordance with Sterling HSA specifications.

WageWorks
WageWorks is a an employee benefits system that includes a HSA. Unlike Fidelity, Lively and many other HSA custodians, an individual HSA holder cannot enroll in WageWorks independently of their job, only through their employer.

A WageWorks HSA has a low-interest FDIC-insured savings account and an optional separate investment account on the BNY Mellon platform for HSA investing. In order to invest, you must maintain at least $1,000 in the savings account, with any balance above that available for optional investing.

WageWorks HSA Fees
Depending on the specific terms of your plan, you might pay a $2.00 monthly fee if the balance in the savings account is under $5,000; some employers may pay all or part of this fee for their employees. There are no investment trading fees or fees to use the investment platform, beyond standard mutual fund expense ratios. WageWorks also charges an additional $3.95 monthly fee for account holders who are no longer employed by their employers; as such, an individual who is enrolled in a WageWorks HSA and who leaves their employer should transfer out of WageWorks to a different custodian and close their WageWorks HSA. Additionally, there is a $16.00 transfer of asset (TOA) to another custodian fee.

WageWorks HSA Investing
In the investment platform, there are approximately 35 mutual funds in the following asset classes: Large Cap US Equity, Small and Mid-Cap US Equity, International Equity, Fixed Income, and All-in-One (target date and two Vanguard LifeStrategy funds).

Of interest to Boglehead investors are the following Vanguard index funds, which are the only index funds in the platform:


 * Vanguard 500 Index Admiral
 * Vanguard Small Cap Index Admiral
 * Vanguard Developed Markets Index Admiral
 * Vanguard Emerging Markets Index Admiral
 * Vanguard Short Term Investment Grade
 * Vanguard Long-Term Bond Index Investor
 * Vanguard LifeStrategy Moderate Growth Investor
 * Vanguard LifeStrategy Conservative Growth Investor

Note that only the two listed Vanguard LifeStrategy Funds are included; Vanguard has two other LifeStrategy funds (Income and Growth) but they are not available in WageWorks. The other WageWorks funds are actively managed funds.

A WageWorks account holder may configure their account to automatically invest new contributions into designated funds, for hands-off account management.

IRS and Treasury

 * IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
 * IRS Publication 502, Medical and Dental Expenses (HSA-qualified expense list)
 * IRS Notice 2004-2 Health Savings Accounts (HSAs)
 * IRS Notice 2004-50 Health Savings Accounts: Additional Q's and A's
 * US Treasury: Health Savings Accounts (HSAs)

Outside links

 * HSA Wikipedia page
 * HSAs and HRAs See Growth Over Four-Year Span, by EBRI.org
 * Health Savings Accounts and Health Reimbursement Arrangements: Assets, Account Balances, and Rollovers, 2006–2014, by EBRI.org
 * The Complete Consumer's Guide to HSAs, by HSA for America
 * HSA for America Maximize your HSA Newsletter
 * Health Savings Account Contribution Limits for married couples according to type of coverage, by SunTrust
 * 2017 Health Savings Account Landscape, a comparison of ten major HSA providers, from Morningstar
 * White Coat Investor's comparison of the top HSA plans for investors

State income tax
This list is not complete, please add info for other states.
 * Instructions for filling out your CA state tax return if you have an HSA