Rarely has health care been more top of mind than now, as Covid-19 ravages the U.S. and hospital costs shoot up. A health savings account (HSA) could help pay for those costs, and knowing what the best HSA accounts are for your particular situation could help you get the most benefit possible.
The average cost of hospital care for Covid patients ranges from about $51,000 to nearly $79,000, depending on age and insurance coverage, according to FAIR Health, a nonprofit that tracks health care costs. The highest average amount paid by private insurance was about $40,000 for people over 60 and lowest for patients between 21 and 40 at just over $21,000. That leaves a large chunk that patients must pay out of pocket.
“HSAs have become more of a lifeline to people than they thought they ever would be,” said HSA expert Roy Ramthun, known as Mr. HSA. “The good thing is that a lot of the expenses they are incurring are going to be able to be reimbursed through their HSA.”
An HSA is a type of savings account that lets you set aside pretax-money to pay for qualified medical expenses. You can use the funds to pay for deductibles, co-payments, coinsurance and other health care expenses.
Setting Up An HSA Account
HSAs may be available through your employer or can be set up individually. Depending on your account provider, you can invest your money in stocks, ETFs or mutual funds to build more reserves to cover future costs. And you can continue to use your HSA even if you change jobs or medical coverage, become unemployed, change your marital status or move to another state.
Considering opening a new HSA account? Learn the details of how a health savings account works. And check out Investor’s Business Daily’s annual list of the Best HSA accounts.
To arrive at our list of the best health savings account administrators, IBD looked at dozens of providers. We considered account offerings as well as input from industry experts.
All 12 providers on the list offer solid HSAs. To highlight exceptional strength in particular areas, we also named award winners in four categories: Investment Options, Investment Quality, Low Fees and Interest Rates.
For 2021, 12 health savings account providers made the IBD list:
12 Best HSA Accounts
UMB Healthcare Services
Bank of America
Evansville Teachers Federal Credit Union
The winning Best HSAs are not ranked. We provide account details so you can evaluate them according to your priorities. We judged dozens of HSA account providers to select ones likely to best fit your health savings goals.
HSA accounts were evaluated on the metrics that matter most. Those include investment quality and options to pinpoint which ones give you the widest selection of highly rated mutual funds and ETFs or the ability to invest in individual stocks. And since money inside an HSA can grow over time, we zeroed in on HSAs with low fees. Fees can eat away at how much money you’ll have left to pay for medical expenses.
Health Savings Account Growth
Americans have more than 30 million HSAs as of Dec. 31, 2020, according to industry tracker Devenir. They set aside more than $82.2 billion as of that date, a 25% year-over-year increase.
With the stock market rallying despite the pandemic, more HSA dollars are being invested. HSA account holders invested $23.8 billion, 52% more than in 2019. On average, investment account holders have $17,926, including investments and money in deposit accounts. About 1.7 million account holders are investing their funds, representing about 6% of all accounts.
With lots of people losing their jobs during the pandemic, it might be harder to set aside funds for an HSA. Still, if at all possible, experts say putting away even a small amount of pretax dollars for health care costs is a wise decision.
Health Account Rules 2021: Contribution Limits
To open an HSA you must have a high deductible health plan. For 2021, the Internal Revenue Service defines HDHP plans as those with a deductible of at least $1,400 for individuals and $2,800 for families. Out-of-pocket expenses can’t top $7,000 for individuals and $14,000 for families.
The IRS also limits how much you can put in an HSA. Contribution limits for 2021 increased by $50 to $3,600 for individuals, and by $100 to $7,200 for families. Maximum catch-up contributions for people over age 55 remain at $1,000.
Note: You have until the April 15 tax-filing deadline to put money into an HSA account for the prior tax year.
“Now is a perfect time to think about contributing to your HSAs,” HSA expert Ramthun told IBD. Why? If you add up all the expenses you had last year and realize you didn’t put in enough money in your HSA to cover them all, you can contribute that amount now.
“Then you can turn around and reimburse yourself right away and get the tax benefit from contributing,” Ramthun said.
HSA Account Rules 2021: Allowable Medical Expenses
The IRS provides a list of which medical expenses you can use for your funds. Generally, you can use HSA funds to cover fees related to diagnosis, cure, mitigation, treatment or prevention of disease. That means payments to doctors and dentists are covered, as well as costs associated with prescriptions and imaging like MRIs.
You can also use your HSA to pay yourself back for qualified medical expenses your insurance didn’t cover and you paid out of pocket, even over-the-counter medicines and treatments. So keep those receipts. You’ll need them to prove the expenses are qualified and that you paid for them out of pocket.
You can’t use HSA funds to pay for medical insurance premiums. However, there are two exceptions to this rule that people may not have thought about until this year, when many folks faced furloughs and layoffs, Ramthun says.
“You can use your HSA funds to pay for insurance premiums if you’ve been receiving unemployment,” he said. “Also, if you’ve been furloughed but (your former employer) is extending to you COBRA continuation coverage, you can pay for those premiums tax-free.”
HSA Rules: The CARES Act Expands Coverage
In March 2020, Congress passed the CARES Act in response to the pandemic. The law includes provisions that expanded HSAs’ allowable expenses.
The law allows HSAs to cover expenses related to telehealth and other remote-care services without first meeting a deductible. The rule is temporary and applies to services provided on or after Jan. 1, 2020, with respect to plan years beginning on or before Dec. 31, 2021.
The CARES Act also made it easier to get reimbursement for over-the-counter products. OTC products like pain relievers, cough syrup and allergy medicines are now reimbursable without a prescription. The new rule applies to amounts paid after Dec. 31, 2019 and has no expiration. However, masks and hand sanitizers did not make the IRS list of allowable HSA expenses.
Unrelated to Covid, The CARES Act also included certain feminine products to the list of allowed medical expenses starting Jan. 1, 2021, and with no expiration. Taxpayers should save receipts of their purchases for their records and to submit claims for reimbursements.
Health Savings Account Rules 2021: Triple-Tax Benefit
The triple-tax benefit of HSAs is powerful. Contributions are tax-deductible. They grow tax-free (at least at the federal level). And funds can be withdrawn without being taxed when used for qualified medical expenses.
There are a few exceptions to this triple-tax edge. California and New Jersey don’t offer tax-free contributions at the state level. And HSA earnings are taxable in California.
Also, HSA holders may have to pay taxes on interest and dividends earned in their HSAs in New Hampshire and Tennessee.
And of course, the states without a state income tax do not provide a state deduction for HSA contributions. Those states are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Watch Those Withdrawal Penalties
If you withdraw money for any purpose other than qualified expenses, you’ll have to pay income tax on that amount plus, for those under age 65, a 20% penalty.
After age 65, you can use HSA funds to pay for all Medicare premiums except Medigap. Employee payments for employer health insurance premiums also qualify.
Distributions from your HSA after age 65 are penalty-free. You can use the funds for qualified and unqualified expenses without penalty. But distributions not used for qualified medical expenses will be taxable.
What To Look For In HSA Accounts
Which HSA account is right for you? That will depend on how you intend to use HSA funds. For starters, look for low fees no matter how you plan to use your HSA funds.
Morningstar’s Leo Acheson’s most recent report says several providers continue to lower their fees, although “they remain high and vary significantly across providers.”
He noted that both Fidelity and Lively charge no fees to those who use HSAs for spending. HealthEquity (HQY) also is a top choice for spenders, as it has eliminated its annual maintenance fee of $35.40, although it still has various other fees.
If you plan to make minimal contributions and frequent withdrawals, consider also how easy it will be to access your HSA funds. If your goal is to use pretax dollars to pay for medical expenses as you incur them, then look for HSA providers that offer debit cards, checking and online banking options.
Banks and credit unions that offer HSAs can be good options because they’ll keep your funds in savings or money market accounts, which are highly liquid and offer higher interest rates. This might be one way to make up for some of the growth you forego by not investing.
One standout is: Evansville Teachers Federal Credit Union. It offers up to 2.01% on HSA accounts with a $500 minimum balance. And no, you don’t need to be a teacher or resident of Evansville, Ind., to have an HSA account with ETFCU.
If you can afford to pay for many of your medical expenses out of pocket, consider HSAs that offer a variety of high-quality investment options. Money experts say HSA account holders should strive to invest funds as soon and as often as they can. Investing is the key to HSAs’ long-term, positive impact on your finances.
What If You Don’t Like Your Employer-Provided HSA?
Many people use the HSA provider offered by their employer. But you don’t have to, if you don’t think it’s the best HSA provider for you, notes Cathy Curtis, an Oakland, Calif.-based certified financial planner and founder of Curtis Financial Planning.
“You can open your own HSA account,” she told IBD. In fact, you can have more than one HSA account, as long as you don’t contribute more than the annual limit in the combined accounts and you have a high deductible health plan.
And what if your employer makes monthly contributions to your HSA account? You don’t want to lose that money, so here’s what you can do:
- Open an account with the HSA provider tied to your workplace.
- Open an HSA account of your liking.
- Transfer funds manually or automatically from your employer plan to your individual plan.
- Count your contributions only once on your tax returns.
Sometimes, the out-of-pocket costs of a high deductible health plan may outweigh the benefits of having an HSA. In that case, you have to decide what makes sense for you and your family.
Best Accounts For Investing
The choice of Investment Quality category winners was based on Morningstar ratings and interviews with financial advisors. Compared with the past, experts say HSA holders have access to better investment options across the board, a sign providers are working hard to provide value to investors.
Among the best health savings account providers, Fidelity, HealthEquity, United Healthcare‘s (UNH) Optum, UMB Healthcare Services and Bank of America (BAC) offer plenty of high-quality options. See our full Best HSAs list for details.
Some providers are standouts for the breadth of Investment Options they offer. Saturna’s offerings are expansive, for instance, and include the option of a self-directed brokerage account. But be prepared to do some research. Its focus is on sophisticated investors who need little assistance.
Other top providers in this category are Further, Fidelity, Lively and Webster Bank‘s (WBS) HSA Bank.
Best HSAs: Fees And Interest Rates
When choosing an HSA account, the key is to keep fees as low as possible. It can be difficult for consumers to easily figure out exactly how much it will cost to maintain a health savings account. Be sure to consider not only monthly account fees but also cost ratios for investments.
Notable providers for Low Fees include category winners Health Equity, Fidelity, HSA Authority, Lively and Evansville Teachers Federal Credit Union.
Interest rates are at record lows, so most HSA providers offer paltry rates this year. But IBD recognizes four health savings account providers in the Interest Rates category: Evansville Teachers Federal Credit Union, Old National Bank‘s (ONB) HSA Authority, Further and HealthEquity.
This article was originally published on Feb. 12, 2021, and was updated on June 15, 2021.
Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.
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