My employer recently switched HSA providers. The old one had horrible investment choices, but there were no fees associated with the standard savings-type account once you hit a fairly low minimum balance requirement. The new one? Fees.
We’re now facing a $2.75/month charge with no way of escaping it. As many of you know, you’re not required to use your employer’s HSA provider so you might be wondering if we’re planning on going it alone.
The short answer is “no”. We’re going to stick with the plan for one simple reason. It would cost us more to avoid the fees. To understand why, you need to understand how HSA contributions work.
As you’re likely aware, HSA contributions come from pre-tax dollars. And when you take a qualified distribution, the money comes out tax-free, too. Kind of like a Roth IRA on steroids (tax break up front, no taxes on the back end).
Ahh, but there’s an important difference between making contributions yourself vs. having them withheld from your paycheck. Yes, when you make contributions yourself you can deduct them from your income taxes. But when them withheld from your paycheck, they come out before FICA taxes are calculated.
In other words, you can realize an additional tax savings of as much as 7.65% (6.2% Social Security + 1.45% Medicare). I say “as much as” because not everyone pockets this full savings. In our case, I earn more than the Social Security ceiling, so I’m actual saving just the 1.45% on Medicare taxes.
But that 1.45% can turn out to be a sizable chunk of change. We’re saving the current family maximum of $6250 in an HSA, which means that we’re saving around $90 on Medicare taxes by having my HSA contributions deducted from my monthly paycheck.
When you subtract our the $33 (12 x $2.75) in HSA fees that we’re paying we still coming out way ahead. And next year, when the maximum increases to $6450, our savings will creep a bit higher. The only bummer is that it appears (I still need to double check) that these fees have to be paid from our HSA balance vs. coming from outside funds.
If I wasn’t over the Social Security ceiling the savings would be even larger — nearly $480 on the family maximum. Yes, the numbers will go down if you contribute less, but you should definitely do the math before deciding to make a clean break from your employer’s HSA provider.
It gets a bit more complex when you start thinking about investing. In our case, we’ll face an additional $2/month fee to have an investment account. But the investment selections with this provider are actually decent, so we’ll consider it. The main downside is that if our employer changes their mind again, things could get messy.
We’ll most likely take a hybrid approach, wherein we use the employer account to receive contributions and then periodically transfer it out to a provider of our choice for investing.
Oh, and if you’re wondering why we would invest in an HSA, see here and here.