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Health Savings Accounts: What they are and how to establish one

At a glance:

  • How to establish an HSA account

  • HSA fees and investment options

  • Beneficiaries and estate consequences of Health Savings Accounts

  • Summary of Health Savings Accounts

Once you've determined that you are (or soon will be) eligible to have a health savings account — you have HSA-qualified health insurance and you meet the other requirements — you may proceed to open an account and start making contributions. Where do you open one? Should you invest any of your funds? Will there be fees, and if so, how much? What happens to your account when you die?

How to establish an HSA account

HSA accounts can be opened at any willing bank, credit union, or other qualified financial institution approved by the IRS to establish HSA accounts. Banks and credit unions are not required to open HSA accounts, so don't be surprised that your local bank or credit union does not offer HSA accounts.

Insurance companies are also approved to open your account. Many insurance companies offer HSA account services through partnership with banks. This often makes it easy to get your account started. You always have the flexibility to transfer your funds to another institution of your choosing at a later date.

The custodian

The institution is the "custodian" or "trustee" of your account. By agreeing to offer HSA accounts, the custodian/trustee agrees to abide by banking laws, offer federal deposit insurance to protect your account, and report necessary tax information to you and the Internal Revenue Service.

Getting started

The general process for establishing your HSA account is very similar to the way you open an individual retirement account (IRA). You do not need permission from your employer or anyone else to establish your HSA account. However, if your employer makes contributions to your HSA account, you may end up with an account opened on your behalf.

The specific process varies from bank to bank. Generally, most trustees and custodians require that you complete an application form in writing, sign it, and return it by mail or fax. Some trustees and custodians have developed account opening processes that allow some aspects to be handled electronically.

Why you should open your account right away

It is important that you open your HSA account as soon as you enroll in an HSA-qualified plan (if not before), because your HSA can only be used to pay for or reimburse qualified medical expenses that you incur after your account is "established." This is an important and subtle rule — one that can surprise you when you enroll in an HSA-qualified plan for the first time.

Typically you enroll in the HSA-qualified plan first, then open the HSA account. Many trustees and custodians allow you to complete the necessary account opening forms or other processes shortly before the date your HSA-qualified coverage becomes effective, so your account is considered "established" on your coverage effective date. As a result, any medical expenses you incur during the first few days of coverage can be paid for or reimbursed tax-free from your account.

It is important that you open your HSA account as soon as you enroll in an HSA-qualified plan. (Photo: Getty Images)
It is important that you open your HSA account as soon as you enroll in an HSA-qualified plan. (Photo: Getty Images)

You can open additional HSAs

You may open and maintain more than one HSA account at different financial institutions. You may deposit as much as you wish into each account as long as your total contribution to all the accounts combined does not exceed the limits for the calendar year. However, because each account custodian/trustee may charge fees, etc., it may not be wise to open too many HSA accounts.

Employers can help

If your employer makes contributions to your account or allows you to make contributions through payroll deduction, your employer can choose a financial institution at which to deposit the funds. This makes it easier for your employer to deposit the funds into your HSA account. However, you can transfer the funds to another bank or credit union if you want your account held at a different institution.

HSA fees and investment options

Custodians and trustees can set administrative fees and other requirements for HSA accounts. These include things like minimum deposit requirements, minimum balance requirements, account set-up fees, account maintenance fees, etc. A survey of HSA custodians and trustees indicated the following ranges for HSA account fees:

  • Account set-up fees — $0–$50 (average = $14.36)

  • Monthly maintenance fees — $0–$10 (average = $2.06)

  • Transaction fees — $0–$5 (average = $0.27)

  • Account closing fees — $0–$30 (average = $10.17)

You should consider these costs when deciding where to open your HSA account(s). However, the fees can be paid tax-free with your HSA account funds. You may also pay the fees separately to maintain a higher account balance.

You can earn money on your account

Most custodians and trustees pay interest on your account funds, just like they do for savings and checking accounts. Interest rates for HSAs vary with the general interest rate environment. Nationally, HSAs pay rates close to rates paid for certificates of deposit (CDs) but rates may vary from institution to institution based on their individual products and policies. Generally, higher interest rates are offered for larger account balances.

You can invest your HSA

Your HSA account custodian/trustee may also offer investment options for your HSA funds. This may be an important consideration as your account balance grows over time. Your funds can be invested in the same types of investments permitted for individual retirement accounts (IRAs), including stocks, bonds, mutual funds, CDs, etc. However, each institution can decide how many and what types of investment options it offers.

You may have more than one HSA

You may open and maintain more than one HSA account at different financial institutions. You may deposit as much as you wish into each account as long as your total contributions to all the accounts combined does not exceed the limits for the calendar year. However, because each account custodian/trustee may charge fees, etc., it may not be wise to open too many HSA accounts.

Buyer's guide

Be sure to shop around for banks or credit unions that offer you good value for your HSA account funds. Some charge high fees that may offset the growth you realize through interest payments or investments. Open your HSA account before your coverage begins, or as soon as possible after it starts.

Doing so will ensure that you have your account opened on the first day of your HSA-qualified insurance coverage, which for many people begins on a holiday (January 1). That will guarantee that any expenses you might incur on January 1 (or later) will be eligible for reimbursement from the account.

Beneficiaries and estate consequences of health savings accounts

You can name anyone you want (including your estate) the beneficiary of your HSA account. If your spouse is the named beneficiary, he/she takes over ownership of the account and it becomes their HSA account when you die. If he/she has HSA-qualified insurance, he/she may continue to contribute to the account as if it were their own.

If your spouse does not have a qualifying plan, he/she may not contribute any more money to the account but may continue to use the account as his/her own HSA for qualified medical expenses tax-free.

If you name someone other than your spouse

If you designate anyone other than your spouse as the beneficiary, the funds in your account will no longer be treated as an HSA upon your death.

If the beneficiary is your estate, the fair market value of the account (as of the date of your death) will be taxable on your final tax return. Qualified medical expenses incurred by you (or your spouse or dependents) prior to your death may be reimbursed from your account before determining the "fair market value" of the account.

If the beneficiary is another individual, your account will become taxable to the recipient. The amount that is taxable may be reduced by any qualified medical expenses incurred by you prior to your death and paid by the recipient of the HSA. The taxable amount will also be reduced by the amount of estate tax paid due to inclusion of the HSA in your estate.

Buyer's guide

Consult your tax advisor or financial planner if you have questions about the estate tax consequences of your account. Be sure to designate a beneficiary for your account, especially if you are married.

If you do not designate a beneficiary, your spouse may have to go through probate court after your death to claim ownership of your HSA (depending on the laws of your state) even though the HSA rules allow the transfer of ownership to occur tax-free.

Summary of health savings accounts

You can open a health savings account in much the same way you open an individual retirement account. Choose a custodian or trustee, fill out an application, sign it, and return it. In some states, you may also have to make a minimum deposit to "fund" your account.

Once your HSA account is established, you can begin using it to save tax-free money for future medical expenses. You can also choose to invest the funds in your account, provided that the custodian offers investment options. Your earnings on these investments will be tax-free.

On another note, be sure to designate a beneficiary for your account. That will ensure that your account funds are passed on where you want them and will minimize estate problems.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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