Three 'Hidden Costs' of Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) have surged in popularity, driven by their tax benefits and potential to offset the expenses of high-deductible health plans. Data show there are about 35 million HSAs now compared to 11.8 million in 2013 and the accounts hold more than $116 billion today, a 500% increase from about ten years ago.

However, the Consumer Financial Protection Bureau (CFPB) says hidden costs lie beneath the surface of these accounts, which can interfere with the tax advantages HSAs offer.

“Health savings accounts are promoted for the tax benefits that chip away at the price tag of health care,” CFPB Director Rohit Chopra said in a release, adding, “Many consumers do not realize the fees, switching costs, and low-interest yields that will come with the accounts.”   

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The watchdog agency recently released a report highlighting several costs and fees incurred by many HSA holders, shedding light on challenges faced by consumers trying to manage healthcare finances and taxes.

HSA tax benefits

Health Savings Accounts offer tax benefits that can help individuals save money on healthcare expenses. First, contributions to HSAs are tax-deductible, meaning individuals can reduce their taxable income by the amount contributed to the account. 

Additionally, funds within the HSA can grow tax-free through investments, and withdrawals for qualified medical expenses are also tax-free. These tax advantages make HSAs a powerful tool for those with high deductible health plans to manage healthcare costs while maximizing savings.

HSA contribution limit

However, the IRS limits contributions to your health savings account each year. The amount you can contribute depends on whether you have single or family coverage and are over 55. 

Note: For 2024, HSA contribution limits are at record highs. Individuals have an HSA annual contribution limit of $4,150, and the limit for family coverage is $8,300. (Those amounts are about 7% more than you could contribute last year.)

Still, the CFPB argues that hidden costs many people are unaware of can diminish an HSA’s potential tax benefits.

Hidden HSA costs

1. Fees. According to the CFPB, one of the hidden costs of HSAs is the array of fees imposed by financial service providers. These fees include monthly maintenance, paper statements, outbound transfers, and account closure fees. The agency says these charges can eat into the funds allocated for healthcare needs, directly reducing the benefits of tax savings afforded by HSAs.

2. Portability. Another issue with HSAs is the lack of fund portability, which the CFPB says adds another layer of cost for consumers. According to the agency, employers often choose the financial service provider for employees' HSAs, leading to situations where consumers are captive to their current provider due to expensive exit fees. This lack of flexibility can hinder people from accessing better terms and lower fees elsewhere. 

However, it's important to keep in mind that the HSA belongs to you, meaning the account and the money in it are yours — even if you change jobs and your HSA funds do not expire.

3. Yields. Low-interest yields offered by many HSA providers are another hidden cost. Despite recent increases in interest rates, most providers offer interest rates well below 1% and sometimes even as low as 0%. The CFPB notes that, as a result, consumers may end up paying more in fees than they earn in interest, diminishing the overall value of their HSA accounts.

It's worth noting that the American Bankers Association Health Savings Account Council has expressed disappoinmtnet with the CFPB's findings. Kevin McKechnie, council executive director said in a statement that many of the fees mentioned in the report no longer exist or are not incurred by consumers.

The council believes that the CFPB report misrepresents the industry and doesn't capture the value of owning an HSA.

HSA costs: Bottom line

Meanwhile, the CFPB says it is working towards ensuring that consumers are treated fairly and advocating for greater transparency in the sector. 

The agency urges account holders to understand fees, lack of portability, and low interest yields associated with HSAs. That knowledge can help people make informed decisions about managing their healthcare expenses and maximizing tax savings. 

Related

• Record-High HSA Contribution Limit for 2024
• Do You Really Know What Your HSA Can Do For You?
• HSAs Make Health Care More Affordable