If you have a high-deductible health plan (generally one with a deductible of $2400 or more for your family per year), you are eligible for a Health Savings Account (HSA). This allows your family to contribute $6250 ($6450 in 2013) per year pre-tax to the account. It grows tax-free and, if spent on health care, can be withdrawn tax-free now or in retirement. Since I recently transitioned to a high-deductible health plan, I am now eligible for an HSA. Many people don’t realize that, unlike a 401K, you don’t have to use the HSA provider your employer has chosen. You can use any provider you like.
There are plenty of choices out there for an HSA provider. Since I plan to use the account primarily as a Stealth IRA, I am most interested in low fees and good investing options. I’ll probably also use it occasionally to actually pay for health expenses, so ease of use and customer service is also an important consideration. These are the companies I considered using.
Alliant Credit Union
Alliant offers 1.25% on any balance of $100 or more. They provide free checks and a debit card and basically have no fees at all. They also have an investing option, but I’m not impressed with it. It’s hard to get good information on it, but it seems to be composed of what I consider lower tier mutual funds, such as Oppenheimer, Putnam, AIM etc. There is also a monthly $5.95 fee for the investing account. They do require you to keep at least $1000 in the savings account portion, but you can invest anything above and beyond that. As a credit union, you do have to jump through some hoops to join, but it’s no big deal and at most will cost you $10. If the investing options were better, this would be a great choice for me.
Stanford Federal Credit Union
Stanford offers 0.20% on their HSA accounts, BUT, if you commit to banking with them (a $500 direct deposit into a separate checking account each month, which I suppose you could use to fund the HSA), you can use their “premier health savings account” which offers a rate of 1.50%. Most fees are waived with the premier checking option. The downside? There doesn’t seem to be any investing option at all. At most it’ll cost you $15 a year to join the Friends of Palo Alto Library, which makes you eligible for the credit union.
This is actually my partnership’s official provider. HSA Bank offers a graduated rate from 0.09% to 0.89% (0.49% for $5-10K) and has a pretty good investment option through TD Ameritrade. You have to keep $5K in the savings account or you pay a $3 monthly fee. On $5K, that works out to an expense ratio of 0.72%, which is pretty significant. The only other significant fee is the brokerage commission of $9.99 per ETF trade, but almost all of my preferred Vanguard ETFs are on the commission-free trade list. So even if I decide to completely invest my funds, I’m only looking at a cost of $36 per year.
I actually met the owner of HSA Administrators at a Bogleheads conference, and he seemed to be a great guy. They are very up-front about fees, and use Vanguard funds for their investment options (and in fact Vanguard links tl them on their site). They brag about the fact that you don’t have to keep any money in a low interest checking account, but they do charge a fee of $45 a year to maintain the account, which is $9 more than you’d pay at HSA Bank to do the same thing. Both charge a minimal fee for checks, but offer debit card transactions (if you choose credit instead of putting in your PIN) for free. Actually, I just realized while researching this that HSA Administrators actually uses HSA Bank for their “debit card account.” So you’re still subject to the $5000 minimum in the account or else you get the $3 a month fee. (Some places on the web state the minimum is $3000, but HSA Bank confirmed to me it was $5000.)
HSA Administrators also charges another fee, 0.32% of the first $20K in any mutual fund per year, which is a maximum of $64 per fund per year. The Vanguard funds offered are reasonable, and mostly offered as Admiral funds with expense ratios similar to the ETFs you can get through TD Ameritrade at HSA Bank. They offer the Prime Money Market Fund too, which used to be a great option for your cash, back when money market funds didn’t suck. I think HSA Bank has really taken the wind out of their sails with their TD Ameritrade option offering free Vanguard ETF trades, and so have a hard time recommending HSA Administrators over HSA Bank.
Fidelity is also in the HSA game, offering their usual assortment of brokerage options and mutual funds. Non-Fidelity ETFs trade for $7.95 and there is a $48 per year HSA fee (waived if you have $250K invested at Fidelity.) Check fees are also minimal just like with HSA Bank and HSA Administrators. One downside is that your cash in the sweep account is only making 0.07%, so Fidelity isn’t a great option if you want to keep any significant chunk of the HSA in cash. But if you already have a lot of money with Fidelity, and plan to completely invest your HSA, this may be your best option.
Wells Fargo offers rates of 0.05% to 0.60% on their HSA. They require you to keep $2000 in the checking account, and then allow you to invest the rest, but only into their proprietary mutual funds, which pretty much suck due to their high expenses.
Adirondack offers a rate of 2.96% [Update 1/13 – now 1%]with no minimum, but they do charge a fee of $25 to enroll and $4 a month. Unfortunately, there is no investment option.
Lake Michigan Credit Union
Lake Michigan is currently offering rates of 1.49% to 2.08% with no significant fees. They say there are additional investment options, but they don’t list them on the website. I called them up and the only option is to buy CDs. You can join the credit union by making a $5 donation to a group working on ALS (yes, Lou Gehrig’s Disease.)
Bank of the Sierra
Bank of the Sierra offers rates of 1.0% to 1.75% without residency restrictions. There is a $20 set-up fee and a $3 a month fee if you don’t maintain $3K in the account. There are no decent investing options anyone on the phone could tell me about.
Other institutions I already have accounts with, including Vanguard, Schwab, USAA, Ally Bank, and my local credit union, don’t offer HSAs. So in conclusion, I think my partnership made a great choice in picking HSA Bank and that’s where I’ll be opening up my HSA. Remember if you’re an employee you should have your employer send your pay directly to the HSA provider to save on payroll taxes on that money. A partner or independent contractor need not worry about that as he pays his payroll taxes independently.