An important message for employees who will soon start signing up for next year’s health benefits: Take a close look at any health savings accounts you are considering enrolling in.
In a new report, Morningstar analyst Leo Acheson examines 10 major HSAs that are popular in the workplace, and his conclusion is anything but glowing.
“There is much room for improvement across the industry,” he concluded. Of all the plans he examined, Acheson identified only one as a “compelling” way for people to set aside money to cover health expenses: The HSA Authority.
HSAs are savings accounts that allow you to set money aside – often by having a pretax sum deducted from each paycheck – to pay for doctors, blood tests, hospitals and other out-of-pocket medical expenses. The money can be used in the short term or stashed away for decades, ultimately helping out with retirement health care expenses if not used sooner.
But if you’re using an HSA to stash away money for the future, the investment choices you are offered matter, and so do the fees you pay. When Morningstar evaluated major HSA plans, it found only four that it could rank positively based on the fund choices offered, the managers who invest the funds and low fees. Bank of America, HealthEquit, Optum and The HSA Authority all made the cut.
On a more limited assessment of quality funds, Morningstar ranked Bank of America, BenefitWallet, HealthEquity, Health Savings Administrators, Optum and The HSA Authority ahead of competitors.
The calculation is different if you’re not worried about building up a long-term stash and instead plan to use the HSA strictly for covering near-term medical bills. Investments choices aren’t as essential if you’re planning to spend the money in the HSA in the short term. Rather, the important consideration when saving money that will be used in the short term is whether the HSA offers a checking account that doesn’t charge monthly maintenance fees. In that regard, Morningstar ranked only Alliant Credit Union, SelectAccount and The HSA Authority positively.
So for both saving for the short term and investing for the future, The HSA Authority is the only standout, according to Morningstar.
Of course, before scrutinizing the HSA plan your employer offers, make sure such an account makes sense for you in the first place.
HSAs are best for young, healthy employees who rarely go to a doctor; not people with a lot of health expenses. That’s because the HSA usually comes packaged with a high-deductible health insurance plan.
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If you’re on a high-deductible health insurance plan, you'll initially pay many of your health care costs out of pocket. The insurer won’t start paying your doctor and hospital bills until after you’ve spent a lot – at least $1,300 if you are single or $2,600 for a family. And even after reaching those sums, you can encounter big costs such as covering copayments.
If paying those types of sums out of pocket would be unmanageable, the high deductible insurance policy probably isn’t for you. To calculate whether a high deductible insurance plan or another option offered by your employer makes more sense financially, try a calculator such as https://www.calcxml.com/calculators/ins11.
If the HSA/high deductible insurance combination sounds like it could work for you, there are some solid reasons to start using it as a savings vehicle.
Having an HSA can be an excellent way to enhance your retirement funds. Putting as much as possible into a 401(k) is important because it can go toward paying for all sorts of retirement needs, including food, housing and health expenses. But since many people can’t save enough in 401(k)s or IRAs to adequately cover their retirement, an HSA can be an extra help. It can help pay for your health care costs in retirement, which can total a hefty sum.
Fidelity has estimated a 65-year-old couple should expect to pay $260,000 for health care in retirement. HSA savings can be used tax-free to pay for Medicare premiums and long-term care insurance. After age 65, an HSA can also be used for other expenses, but if you spend on something other than health care the money will be taxed like income.
On the other hand, an advantage of HSAs is the tax treatment they are given; Uncle Sam gives you a break on taxes when you save in an HSA. Money you put into the account isn’t taxed, money that stays in the account isn’t taxed and money you take out to pay for medical costs isn’t taxed. That’s a good deal.
Because you aren’t taxed, every penny you save will count a lot more than if it was sitting in a regular savings account.
Individuals can save as much as $3,400 in an HSA annually; a person with a family could stash away as much as $6,750, and if you are 55 or over you can add another $1,000.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Readers may send her email at firstname.lastname@example.org.