Does it make sense then to max out savings in an HSA before contributing to a 401(k)? It’s all in the details, according to Morningstar’s Acheson.
“If you’re saving through your company, it depends what your company matches in the 401(k) versus any contribution they might make to your HSA. So while the HSA would have greater tax benefits, the contribution or the match might be higher for your 401(k) than your HSA,” he said. Clarkin agreed. “Don’t leave money on the table,” he said. “Don’t contribute to your HSA until you’ve taken full advantage of that match, but at that point, it’s very hard to argue not to max out your HSA and then go back to your 401(k).”
Fee Fright
A potential obstacle for advisors incorporating HSAs into their clients’ retirement plans is fees. Acheson warned that determining the fees charged by an HSA provider can be tricky. Fees can be numerous, and there aren’t consistent disclosure requirements.
“Be careful of the fees that are present in HSAs. There are a number of different fees to watch out for, especially if you’re investing,” he said. “There are underlying fund fees, of course, and then most of the providers charge an investment fee if you want to invest. On top of that, there’s a range of additional fees that can be charged for things like excess contributions, paper statements, things like that.”
Morningstar’s HSA landscape report found that although fees are coming down, they’re still high and vary drastically. The 10 providers examined in the report charge between 0.02% and 0.69% annually for the cheapest passive 60/40 portfolio.
Some providers will waive account maintenance fees at a certain threshold, Acheson said, but others don’t and some (like Fidelity, Lively and the HSA Authority) don’t charge them at all.
“Comparing one HSA versus another from a fee standpoint is pretty challenging. It can be really hard to get transparency on these HSAs just by looking on the website,” he said.
HSAs and Long-Term Care
Although insurance premiums aren’t typically considered qualified health expenses for a health savings account, the Internal Revenue Service does allow HSA owners to use funds on long-term care insurance premiums up to a certain amount. The amount depends on the owner’s age, ranging from $430 for someone 40 or younger to $5,430 for someone 71 or older.
A white paper by Nationwide notes that while long-term care policy premiums meet the IRS’s requirements for a qualified medical expense, an LTC rider on a life insurance policy does not. That’s partly due to a rule in the Pension Protection Act of 2006, according to Nationwide, “which states that if the cost of an LTC rider on a life insurance policy is paid for by a deduction from the cash surrender value, then it will not be considered a qualified medical expense.”
There are other restrictions for owners who want to use HSA funds to pay for LTC premiums: They may not take a Code Section 213 medical deduction to pay for the same premiums.
The IRS considers long-term care services qualified if they’re required by a chronically ill person, and are part of a care plan set out by a licensed health care professional.
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
