I read your article about health savings accounts and have a question. I have been fully funding my HSA, paying medical expenses out of pocket and planning to reimburse myself in the future with tax-free HSA dollars. Recently, my employer switched to an HSA provider that only offers a low-interest savings account and no other investing options. Are there other options for investing the money?
You aren't trapped by your employer's limited investing options. As long as you have an HSA-eligible health insurance policy (with a deductible of at least $1,300 for individual coverage or $2,600 for family coverage in 2016), you can contribute to an HSA with any account administrator, whether it is offered through your employer or it is an HSA you sign up for on your own. But if your employer only lets you contribute to one administrator's HSA through payroll deduction, it's usually best to continue making new contributions to that account, even if it doesn't have the best long-term investing options.
That's because contributions you make through payroll deduction are not only subtracted from your paycheck before federal income taxes are calculated, but they also avoid the 7.65% Social Security and Medicare withholding (FICA taxes). If you contribute to a different HSA on your own, your contributions will be tax-deductible but will not avoid the FICA taxes. Also, many employers match HSA contributions, but you may lose the match if you don't contribute to its own HSA through payroll deduction. You may also have lower fees through your employer's HSA.
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However, there is a good compromise. Roy Ramthun, president of HSA Consulting Services, recommends making new contributions through payroll deduction to your employer's HSA to take advantage of the break on FICA taxes, then transferring funds (once or twice a year) from your employer's HSA to another HSA with better investing options. It's best to do this rollover through a "trustee-to-trustee transfer," if available through both HSAs; most HSA administrators have a form to complete the transfer. Before you move the money, make sure there are no fees for the transfer on either side, says Ramthun.
You can search for HSA administrators that offer mutual funds at HSA Search, and see details about each administrator's fees and minimum investing requirements. See How to Find a Good Health Savings Account for more information.
