HSA advice

[tulak]

My DW has an HSA this year, which is a first for us. I was originally thinking that we'd save the max in the HSA every year and pay out of pocket for medical expenses, but in looking at her HSA, I'm not sure that's the best route. I'm curious to hear other opinions on what I'm thinking.

DW's HSA has terrible investment options. All actively managed funds, starting at an ER 0.57% and going up quite a bit from there. This is where her employer contributions go, for a total of $700/year.

It's my understanding that she can have multiple HSAs, so my thinking is that we'd open an HSA somewhere that offers Vanguard funds with low/no fees (need to investigate where). The way I understand an HSA is that a maximum of $3300 can be contributed for 2014, which also includes the $700 from the employer. This means that we can open a new HSA somewhere else and contribute $2600. Is that correct? Are there any issues with having multiple HSAs?

The second part is that I'm thinking of spending the $700/year from the employer for medical expenses. Originally I was thinking that we'd rollover this balance to a better HSA once DW leaves her employer, but since the options in the plan are so bad, I'm thinking it might be better to use the money for medical expenses. Is that a good idea?

The only negative that I can think of is that we can't contribute directly to her employer sponsored HSA to avoid payroll taxes. In looking at their website, I don't see a way to set this up, so it might not be an option anyways.

Any thoughts from others on this approach is appreciated. I want to make sure I'm not missing anything before I commit to another HSA and start spending the employer contributions.

Edit: I found the form to make payroll deductions, so yes, DW could contribute and avoid payroll taxes. But the options are still bad, so I don't think this helps avoiding another HSA.

 

[panacea]

I'm not so sure the .57% expense ratio is so bad if the fund choices are good... look at the long term performance net of expenses and then decide. If they're good, then it would be an easy choice to stay put and get the convenience of payroll deduction with the payroll tax break. If they're just so-so, I would set up a second HSA (no problem doing that) and then roll over the balance of the mediocre account to the better account once annually. I think you can get Vanguard funds at www.HSAadministrators.com. That's off the top of my head but I bet I'm close. By the way, if your DW has you on the insurance, you can contribute something like $6,550 instead of the $3,300.

 

[audreyh1]

HSA administrators adds .32 on top of the Vanguard mutual fund ER of 0.12 or higher, plus a $45 per year administrative fee, so you might not be as bad off as you think.

 

[LOL!]

Don't forget that contributions from a paycheck are before SS/medicare get taken out. I think you should max out your contributions. I think you don't have to use the investment account, so could have things in a savings account, too.

I have maxed out HSA contributions every month that I have been eligible. My company chose HSABank and paid the fees if one's account was too low. Now that I am retired, I have no fees because I keep the required minimum for no fees in the savings account and the rest goes into the no fee brokerage account at TDAmeritrade.

 

[ziggy29]

I don't think 0.57% in an HSA is that bad -- especially if you aren't charged monthly custodial fees.

And as was said above, if you contribute to a non-employer HSA outside of payroll deductions, you can deduct the contributions from federal income tax but NOT Social Security or Medicare tax. But if you contribute to an HSA through a qualified employer cafeteria benefits plan, you don't pay SS or Medicare taxes on those contributions, up to (I think) $6500+ a year. On a $6500 contribution that's an extra 7.65% taken out in payroll taxes, or around $500 a year.

That is worth a few extra basis points on the fees, IMO.

 

[thefinancebuff]

The only negative that I can think of is that we can't contribute directly to her employer sponsored HSA to avoid payroll taxes. In looking at their website, I don't see a way to set this up, so it might not be an option anyways.

Usually during open enrollment she selects how much she contributes to her HSA through payroll deduction. If open enrollment is already over, it's too late now, but it can be an option next year. No problem with opening her own HSA elsewhere for the $2,600 contribution this year. She can rollover from the employer's HSA to her own HSA once every rolling 1-year period. That way you get the best of both worlds.

 

[tulak]

For starters, thanks for all the feedback. It definitely provided some ideas for me to pursue.

I'm not so sure the .57% expense ratio is so bad if the fund choices are good... look at the long term performance net of expenses and then decide. If they're good, then it would be an easy choice to stay put and get the convenience of payroll deduction with the payroll tax break. If they're just so-so, I would set up a second HSA (no problem doing that) and then roll over the balance of the mediocre account to the better account once annually. I think you can get Vanguard funds at www.HSAadministrators.com. That's off the top of my head but I bet I'm close. By the way, if your DW has you on the insurance, you can contribute something like $6,550 instead of the $3,300.

HSA administrators adds .32 on top of the Vanguard mutual fund ER of 0.12 or higher, plus a $45 per year administrative fee, so you might not be as bad off as you think.

The .57% are short-term/TIPS bond funds. ERs quickly rise to 0.80%+ with few options for equity funds. Those are 1%+ and some also have loads. However, I did find an American Funds Balanced Fund (BALFX) that might work out. It's the F1 class of shares, which has no load and ER of 0.66%. Other than that, I'm surprised at how many terrible funds exist. It seems like a lot of them ended up in this HSA. I really feel for others that are stuck with these options in their 401k.

Panacea, it never occurred to me that you could rollover the balance annually. I assumed that this is like a 401k, where you can only rollover after severing employment. If we can rollover annually, then this might be a good option. I'm going to look into this and see if it's an option. Also, it's only my DW policy. I have a separate policy through my employer with our two dependents.

Don't forget that contributions from a paycheck are before SS/medicare get taken out. I think you should max out your contributions. I think you don't have to use the investment account, so could have things in a savings account, too.

I have maxed out HSA contributions every month that I have been eligible. My company chose HSABank and paid the fees if one's account was too low. Now that I am retired, I have no fees because I keep the required minimum for no fees in the savings account and the rest goes into the no fee brokerage account at TDAmeritrade.

I don't think 0.57% in an HSA is that bad -- especially if you aren't charged monthly custodial fees.

And as was said above, if you contribute to a non-employer HSA outside of payroll deductions, you can deduct the contributions from federal income tax but NOT Social Security or Medicare tax. But if you contribute to an HSA through a qualified employer cafeteria benefits plan, you don't pay SS or Medicare taxes on those contributions, up to (I think) $6500+ a year. On a $6500 contribution that's an extra 7.65% taken out in payroll taxes, or around $500 a year.

That is worth a few extra basis points on the fees, IMO.

Usually during open enrollment she selects how much she contributes to her HSA through payroll deduction. If open enrollment is already over, it's too late now, but it can be an option next year. No problem with opening her own HSA elsewhere for the $2,600 contribution this year. She can rollover from the employer's HSA to her own HSA once every rolling 1-year period. That way you get the best of both worlds.

I'm looking into the payroll deduction. I found the form, but they also state that your employer might not support payroll deductions for an HSA and you need to check with payroll. It also doesn't state that the deductions can only be done during open enrollment, but maybe that's the case. I'm going to have my DW check with them to see. If they don't support payroll deduction then the choice is easy, we'll just open another HSA.

 

[marko]

I'd like to resurrect this thread with a few quick questions:

We're switching to a HD plan for the first time. It runs from December 1, 2014 to November 30, 2015. I plan to take advantage of the "last month rule" for the full amount for 2014 taxes.

1) As our policy expires in November '15, (less than a full calendar year) are we still considered eligible as long as we re-up our coverage with the same/similar plan?

2) I've been unable to find the 2014 tax penalty should we fail...2013 was 20%; anyone know if it's changed?

3) I get that should we become ineligible that the contribution is counted as income but the IRS 969 pub has me stumped: is the example citing "Erika's" income or contributions?

From IRS 969
Example 2.

Erika, age 39, has self-only HDHP coverage on January 1, 2013. Erika changes to family HDHP coverage on November 1, 2013. Because Erika has family HDHP coverage on December 1, 2013, she contributes $6,450 for 2013.

Erika fails to be an eligible individual in March 2014. Because she did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), she must include in income the contribution made that would not have been made except for the last-month rule. Erika uses the worksheet in the Form 8889 instructions to determine this amount.

January $3,250.00
February $3,250.00
March $3,250.00
April $3,250.00
May $3,250.00
June $3,250.00
July $3,250.00
August $3,250.00
September $3,250.00
October $3,250.00
November $6,450.00
December $6,450.00
Total for all months $45,400.00
Limitation. Divide the total by 12 $3,783.34
Erika would include $2,666.67 ($6,450 – $3,783.34) in her gross income on her 2014 tax return. Also, a 10% additional tax applies to this amount.

 

[jIMOh]

I wouldn't make a tax decision based on the cost of investments.

I don't even make investment decisions on the cost of investments.

 

[marko]

I wouldn't make a tax decision based on the cost of investments.

I don't even make investment decisions on the cost of investments.

I think you mis-read my question. I'm asking about HSA eligibility.

 

[Animorph]

I believe you maintain your eligibility as long as you maintain continuous HSA eligible coverage. The fact that it possibly involves a plan transition should be irrelevant.

The example shows the yearly contribution limit amount for each month. They are just averaging the yearly limits to find the actual yearly contribution Erika could make.

 

[marko]

Thanks!

 

[bingybear]

HSA administrators adds .32 on top of the Vanguard mutual fund ER of 0.12 or higher, plus a $45 per year administrative fee, so you might not be as bad off as you think.

It is a little more complicated that this from what I read. The 0.32 is one possibility, per their site there are some funds that have a 0.25 adder. There are caveats to this. The 0.32 is only charged on the first 20k into each individual fund while the 0.25 is not capped. However, I have no found on the site which fund uses which charging method.

From HSA administrators site Depending on the product selected, your custodial fee may be 0.0008 per quarter times account balance ($0.80 cents per $1,000 every three months), capped at $20,000 account balance per fund. Or it may be 6.25* basis points per quarter (i.e, $0.625 cents per $1,000 every three months) with no cap. Mutual fund account maintenance fees will be deducted from the account balance each quarter. *Vanguard funds only

Looking at this I would assume the uncapped amount would be correct based on the *. I have emailed them a question to clarify which method goes with which funds.