Choice Comes to Health Savings
As account balances rise, a variety of investments arrive.
By Kimberly Lankford, Contributing Editor
From Kiplinger's Personal Finance magazine, April 2005
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When Lizette Pirtle left her job to join husband Bob's consulting business last year, she also left the family's subsidized health benefits behind. The Tallahassee, Fla., couple now faced the prospect of paying $900 a month to stay on her old employer's health insurance. But the Pirtles found a better way: a high-deductible policy teamed with a tax-favored health savings account (HSA).
Their Golden Rule policy has a $5,250 deductible before benefits kick in, but it costs just $312 per month. The $7,000-plus they save in annual premiums will more than cover the deductible. And then there's the tax savings. The Pirtles contributed $4,700 last year and will add more than $5,000 this year to their HSA. Every dime is tax-deductible, and the money can be withdrawn tax-free to pay medical bills.
The Pirtles are stretching the benefits still further because they've been healthy and haven't had to touch much of the money. Their plan is to let the HSA grow into a supplemental tax-deferred retirement account. Leftover cash can be rolled over year after year, and at age 65 they can spend the funds penalty-free for any purpose. (They'll owe tax on nonmedical withdrawals.) "We're maxed out in our retirement plans," says Lizette. "What other avenue do we have to invest in tax-deductible vehicles?"
Folks who can afford it pay their out-of-pocket expenses with non-HSA money, just so they can leave their tax-sheltered accounts untouched. One hitch: Until recently, HSA investing options were severely limited. When the Pirtles opened their HSA, most plans offered only fixed-rate accounts paying a puny 2% to 4%. Few allowed mutual fund or stock choices, primarily because balances were small and many people needed to have the money available to pay their medical bills. But now that HSA owners are accumulating thousands of dollars, they're demanding better long-term investments.
And the market is responding. A handful of companies now let you invest HSA money in funds or directly into stocks, and several major banks and investment firms are planning to enter the HSA business soon. "Within a year, the majority of the trustees and administrators will have an investment option," predicts Dan Perrin, executive director of the HSA Coalition and publisher of the HSA Insider newsletter.
Better investments. Right now, a few companies that were active in the medical-savings-account business (a precursor of HSAs, which first became available in 2004) offer options beyond fixed accounts. For example, Health Savings Administrators lets you invest HSA money in 15 Vanguard funds, and First HSA offers a range of funds and individual stocks. These companies offer only the savings accounts; you must buy your health policy from an insurer.
First HSA's investing options appealed to Doug Desmond of Lancaster, Pa., who owns a company that manufactures water-treatment components. He's 37, single and doesn't have many medical expenses, so he's a good candidate for a low-cost, high-deductible insurance policy. He opened a medical savings account about four years ago, then switched to an HSA. He has an Assurant Health policy with a $2,650 deductible and contributes the same amount (the maximum for single people) to his HSA.
Desmond keeps $1,000 in a fixed account (in case he needs to tap it for medical bills) and invests the rest in a portfolio of mutual funds from big-name companies, including Alliance, MFS, Oppenheimer and Pimco. "I have other cash I use for medical expenses instead of using the plan," he says. "This helps me put tax-deferred money aside for the long term."
More choices. Several big banks are entering the HSA business and are gradually expanding their investing options, too. Mellon Financial Corp. has paired with several health insurance companies (including many Blue Cross and Blue Shield plans) to provide an HSA, which currently offers a fixed account and three Dreyfus mutual funds. "We will be adding to that this year, and we're looking to offer a full brokerage option down the road," says Steve Hooper, director of HSA product management. JPMorgan Chase offers its HSA in conjunction with Cigna, several Blue Cross and Blue Shield plans, and other large insurers. It allows investments in mutual funds as well as a fixed account, and it plans to beef up its offerings this spring.
Both Wells Fargo and Fidelity plan to introduce HSAs for individuals within about a year. "I think there's going to be continuous evolution in the product, and we're not done seeing enhancements," says Brad Kimler, a senior vice-president at Fidelity.
Meanwhile, eHealthInsurance will soon offer a menu of HSAs from several companies -- some paired with health insurers and others available separately. It already offers a plan with thousands of mutual funds and full brokerage options. For a list of companies offering HSAs and insurers offering HSA-eligible health plans, see the HSA Insider Web site.
Note this: Even though investing options may grow significantly as the year goes on, don't wait to open your high-deductible health plan. For every month you delay, your maximum contribution for the year ($2,650 for singles and $5,250 for families this year) shrinks by one-twelfth. You can always roll over your HSA to another company if you find a better plan later.
--Research: Christine M. Varner