When I set up my HSA early in 2004, I went with HSA Bank.  The main reason I chose them was because they offer a discount brokerage option through Transamerica Financial Advisors, allowing the HSA-holder to direct his or her investments as they choose.  I made the maximum contribution, which in 2004 was $5,100.  I kept a couple hundred dollars in a savings account so that I could pay for small expenses like aspirin without having to save and add up those receipts.  The rest I put in a mutual fund, with the intention of letting this account grow tax-deferred, and of reimbursing myself in future years after the account has grown.

I am in no way offering investment advice, but am just sharing my story to illustrate what can happen.  I invested my funds in a mutual fund called Columbia Acorn International Z (ACINX).  In 2005 and 2006 I also deposited the maximum amount.  In 2004 the fund had a 29.5% return, in 2005 it grew by 21.8%, and in the first 3 months of 2006 it has grown 13.23%.  Making these deposits has earned me about $4,500 in tax savings, and about $5,000 in tax-deferred investment growth.  The combined $9,500 is more than I have paid for my health insurance during this same time period - in effect giving me "free" health insurance.

Though I can pat myself on the back about my brilliant investment decision, I know that I won't always get this rate of return.  But I now have enough in my account that I can comfortably choose a very high deductible (and low premium) plan, without having to worry about covering the deductible.

My strategy, which I talk about in Issue 3 of Maximize Your HSA, is to let my money grow tax deferred, and reimburse myself at age 65 for any expenses I incur over the years.  If I can average a 12% return on my money, I should have about $550,000 in the account when I retire.

Insurance Company Partner or Independent HSA Administrator?

Most insurance companies now partner with an administrator, enabling you to send in one monthly payment that can cover both your health insurance premium and an HSA deposit.  This makes the process more convenient when you first get started.  Some also offer an automatic claim rollover that allows account holders to have their account automatically debited to pay for claims.

However, there are a couple of important reasons that you may want to choose an administrator independent from your health insurance company.  The most important reason is that insurance rates change frequently, and most people who are covered by individual plans (as opposed to group coverage) will find it financially beneficial to switch insurance companies every few years.  HSA accounts that are tied to a particular insurance company often have increased fees and lower (or no) interest if the account holder no longer carries the accompanying health insurance.

The second reason many people choose an administrator separate from their health insurance provider is that these administrators often have lower fees and provide more investment options.

Examine Fees and Returns

As a consumer you should be just as smart, informed and cost conscious when shopping for health savings accounts as Health Savings Accounts encourage you to be when choosing a doctor, procedure or medicine.  The first two factors you'll want to look at are the fees the administrator charges, and the rate of return on your investment.

Banks earn much of their money through various fees - most are pretty small, but they can add up.  If you plan to slowly fund your account, you may want to be particularly conscious of the fees being charged.  Some of the fees you may see include set-up fees, monthly fees, annual fees, and even account closing fees.  Two administrators I am aware of that don't charge any of these fees are American Chartered Bank and Fayetteville Bank.

Other fees to be aware of include charges for checks, ATM withdrawals, debit card usage, and online bill paying.

All administrators offer a savings account, with interest rates that range from less than 1%, to up to 4.5% or more, depending on the account balance.  There are some administrators that also offer a select group of mutual funds, and there are several administrators that offer full-brokerage services, giving you the option to purchase virtually any stock, bond, mutual fund, or other similar investment.  Two of the most popular administrators with full brokerage services are HSA Resources Bank and HSA Bank.

What Do You Get For Your Money

The most basic HSA accounts require you to mail or fax a request for withdrawal.  If you plan to take money out of your account on a regular basis to cover household medical expenses, prescriptions, or other regular medical expenses, a debit card is an important feature to look for.

Some administrators are now offering a credit card with their HSA accounts.  This solves a common problem that many first-time HSA account holders face - a large medical expense before the HSA balance has had a chance to grow.  The expense can be paid with the credit card, and then the card balance can be paid off as funds are made available to the HSA.

Other administrators offer additional services to set themselves apart.  Sterling HSA will review the EOB (Explanation of Benefits that you get from the doctor or hospital) for accuracy and errors, and will then pay your bill for you from your account.

DataPath Services offers an electronic HSA claims repository where account holders can store their receipts indefinitely and then access the receipts quickly and easily with a few clicks of the mouse.  Expenses incurred today can be reimbursed decades later, allowing interest to build tax-free and ensuring that account holders do not miss out on any of the tax-advantaged benefits of their HSA.

A list of preferred administrators can be found at our website on our HSA Administrator page.  Another resource is the Directory of HSA Administrators website.

Set up an HSA - What Are You Waiting For?

HSA-qualified health insurance plans offer much lower premiums than traditional co-pay plans.  But the biggest benefits of Health Savings Accounts come to those who also set up and fund a health savings account.  Any money deposited in the account is tax deductible, effectively reducing your net health insurance premium by up to $1,700 or more each year.  Money can be withdrawn from the HSA to pay virtually any type of medical expense, thus making all medical expenses tax-deductible.  And money left in the account grows tax-deferred like an IRA, making an HSA the best way to save for future medical expenses.

Within the last two years, Americans have deposited nearly $1 billion in tax-advantaged health savings accounts.  HSA administrators and custodians have collectively opened more than 820,000 accounts and say they are adding about 60,000 new accounts each month.

If you have an HSA-qualified plan but have not yet opened your health savings account, I encourage you to do so immediately.  Only then can you take advantage of the tax-deferred growth, as well as the ability to run medical expenses through the account, thus making them tax-deductible.

To your health and wealth,