Author Topic: HSA investment questions  (Read 4909 times)

braingrenades

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HSA investment questions
« on: April 25, 2016, 09:24:38 AM »
A member referred me to MDM's list and as I was going down it I came across HSAs.  I had one years ago but never really did anything with it. After learning more about them I'd like to get it going again. I'm assuming I cannot use it to make my monthly premium payment but can use it for pretty much everything else related to medical, vision, and dental. I read I can also use this money for investing and was curious how this worked. I'd imagine the types of investments I could choose from would vary from bank to bank. This makes me think though if my money is tied up in an index fund or some other investment how can I use it for medical expenses. Do I need a certain ratio of available cash to what's being invested?  How much is the company I work for involved? Is it more in my hands just to set everything up with a bank and then give that information to my employer or does my employer have to offer some type of HSA option? Any information would be appreciated. Thanks in advance!

Franklin

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Re: HSA investment questions
« Reply #1 on: April 25, 2016, 10:05:38 AM »
I've participated in two HSAs and here is my experience:

You enroll in the HSA during open enrollment each year.  The company sets up your HSA account with the HSA provider - this will be your cash account for which you pay medical expenses.  The HSA account will also have an investment account attached to it, usually with a brokerage/bank.  My investment account has about 20 fund choices, including Vanguard S&P 500. 

You will be required to leave a small amount in the cash account at all times.  For me it was $500.  The rest can be invested.  Money can be exchanged between the cash account and the investment account as you desire.  You can even set automatic investing. 

So in order to pay for a medical expense, you would have to sell some of your investments so that there is enough cash in your cash account.

Optionally, if you want to use your HSA as a retirement vehicle then read this:   http://www.madfientist.com/ultimate-retirement-account/

Senor Smallchange Soulpatch

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Re: HSA investment questions
« Reply #2 on: April 25, 2016, 10:14:10 AM »
There's a ton here, but I'll take a crack at it.  Standard disclaimer... I'm some anon jerkoff from the internet, not a financial professional.  If anything I say turns out to be inaccurate and costs you money, that's on you...

I'm assuming I cannot use it to make my monthly premium payment but can use it for pretty much everything else related to medical, vision, and dental.

Correct.

I read I can also use this money for investing and was curious how this worked.

You stuff money into the HSA and don't spend it.  Cover your routine medical bills with your normal cash flow.  At some advanced age (55? Not really sure and can't be bothered to look it up at the moment) you can withdraw from the HSA for non-medical reasons without getting hit with a penalty.  However, these withdrawals would be subject to income taxes, just as they would if they were coming from a traditional IRA or a 401k.

But here's the real trick... HSA withdrawals are completely tax free at any time for medical expenses, and there's nothing saying that the expense needs to be incurred in the same year as the withdrawal.  So save all of the receipts from those medical bills you're cash-flowing while you were contributing to the HSA and a couple decades down the line you will be sitting on a tidy sum that can be pulled out of the HSA for any reason, completely tax free.  This is obviously a handy tool to have in the toolbox if you're FIRE years before you can pull 401k or tIRA money out without a penalty.

I'd imagine the types of investments I could choose from would vary from bank to bank. This makes me think though if my money is tied up in an index fund or some other investment how can I use it for medical expenses. Do I need a certain ratio of available cash to what's being invested? 

Yes.  Some plans are certainly better than others when it comes to fund selection, fees, etc.  Every plan I've heard of requires some minimum sum in a cash account earning essentially zero interest.  Mine happens to be $2,500.  This ends up not being too complicated.  Every payroll deduction goes into the cash account, and in my case I have a setting available to automatically invest anything in excess of $2,500 so I never really have to think about it other than taking a peek once a quarter or so and patting myself on the back as I watch the balance grow.

It's just as easy in reverse.  When you make a withdrawl, it will come out of the cash account first, then if necessary investments will be sold to fund the rest of the withdrawl and/or top up the cash account to the required minimum.  This is all a mouse click or two in this day and age at just about any custodian.

How much is the company I work for involved? Is it more in my hands just to set everything up with a bank and then give that information to my employer or does my employer have to offer some type of HSA option? Any information would be appreciated. Thanks in advance!

If you want to use automated payroll deductions, then you are limited to your employer's plan and the investment options therein, just like a 401k.  If your employer's plan well and truly sucks, then it may be worthwhile have them handle the payroll deductions and periodically roll the balance out to a plan of your choosing.  I think you can do one rollover a year.  The employer plan would have to suck super duper hard and/or you would need an enormous balance to make this worthwhile.  I'm paying like 0.9% to hold a domestic stock index fund in my HSA, which is obviously awful, but when I do the math and look at the actual savings I'd get by rolling the money out it's simply not worth my time until I get the balance up into the $50k plus range, and at a yearly max contribution of $6,750 it takes a while to build up that kind of balance.
« Last Edit: April 25, 2016, 10:15:55 AM by Senor Smallchange Soulpatch »

braingrenades

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Re: HSA investment questions
« Reply #3 on: April 25, 2016, 11:22:58 AM »
Thanks for the information! So turns out my current employer only offers a FSA which does not allow you to invest as you would in a 401K or IRA. Also out of the money you put in it, only $500 rolls over (sounds like $2400/year is what you contribute). So with all that said, would it be better to just open a HSA elsewhere and contribute money towards that so I could also make some investments? And if I did this by allocating a portion of my paycheck to a HSA would it be a headache for my employer since it would be tax deferred or is this possible if they don't offer a HSA?
« Last Edit: April 25, 2016, 11:33:13 AM by braingrenades »

bacchi

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Re: HSA investment questions
« Reply #4 on: April 25, 2016, 11:28:01 AM »
You can't have both an FSA and an HSA. Well, you can, but the FSA has to be a limited purpose FSA (usable only for vision and dental expenses, I believe).

You also need an HDHP (High Deductible Health Plan) to even consider an HSA.

Interest Compound

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Re: HSA investment questions
« Reply #5 on: April 25, 2016, 11:30:29 AM »
I use my HSA as a retirement vehicle. I did lots of research on this, and ended up at Saturna. It was the cheapest option I could find that offered index funds, and didn't require any money sitting in cash before I could invest, which has it's own opportunity cost which is it's own fee. This thread was particularly useful. Here's the TL:DR. Make your investment once a year, and all you'll have to pay is the "cost per trade" (once a year), and any dividend reinvestment fees (probably 4 times a year).

Vanguard Mutual Funds
=========================
Cost per trade: $24.95
Admiral Shares: Yes (*without* meeting the minimum 10k requirement).
Dividend re-invest: no charge
Inactivity fee (no trade within calendar year): $12.50


Fidelity Mutual Funds
=========================
Cost per trade: $14.95
Admiral Shares: Yes* (but *will* need to meet 10k requirement). The new website will give you an error right away if the order doesn't meet the fund's minimum.
Dividend re-invest: no charge
Inactivity fee (no trade within calendar year): $12.50


ETF (Vanguard & Fidelity)
=========================
Cost per trade: $14.95
Dividend re-invest: $1
Inactivity fee (no trade within calendar year): $25

seattlecyclone

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Re: HSA investment questions
« Reply #6 on: April 25, 2016, 12:19:20 PM »
The big thing here is that your health insurance must qualify as a "high deductible health plan." The main requirements for such a health plan is that the deductible (for a single) must be at least $1,300 and the out-of-pocket maximum must be no higher than $6,550.

If you get health insurance through work, and they do not offer an HDHP, an HSA isn't an option for you at this time. You can still spend any money you put in an HSA in previous years, but further contributions will need to wait until you get on a qualifying health plan.

If you have an HDHP through work, the company will often select an HSA provider to put everyone's contributions into. Do make payroll contributions to your HSA if possible because you don't have to pay social security tax on these contributions.

If you don't have any health insurance through work, you can sign up for an HDHP through your local Obamacare exchange. It's then up to you to find a place to open an HSA. You can deduct the contributions when you file your taxes, though you don't get the social security tax break if you contribute this way.

braingrenades

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Re: HSA investment questions
« Reply #7 on: April 25, 2016, 12:47:40 PM »
Thanks for the feedback. My work does offer healthcare but I do not qualify because I'm only PT (read more about me here). Because of this I go through Covered California and have the Silver plan with Kaiser. The individual deductible is high (I believe $6,000 with OOP Max at $6,500).

I gave Saturna a call and discussed using a HSA as a shell with a brokerage inside. However, since my employer isn't offering the HSA sounds like the money I contribute would all be taxed and the tax-deferred benefit of all this is one of the most important ones right? I'll double check with HR at my work to see if there's some way I could make a tax-deferred contribution to a HSA but my guess is they will not allow it.

So with all that would it still be worth pursuing a HSA?

Pooperman

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Re: HSA investment questions
« Reply #8 on: April 25, 2016, 12:49:48 PM »
One of the best HSA investment plans is with Wells Fargo of all places. You can invest everything above $1k. If your total account (cash + investments) are above $5k, you pay no monthly fee. Investing in the funds costs nothing, and they have one really good fund (0.25% ER S&P 500 index). Investments happen any time your cash funds go above your cash limit automatically.

The money you put into the HSA is tax free. If the money comes from an employer directly, it's tax free AND employment tax free as well (that's the employer bonus part).

seattlecyclone

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Re: HSA investment questions
« Reply #9 on: April 25, 2016, 02:09:07 PM »
However, since my employer isn't offering the HSA sounds like the money I contribute would all be taxed...

This isn't quite true. You don't pay federal income tax on money you put in an HSA, whether you contribute through payroll deductions or out of your checking account. The difference is that contributing through payroll deduction can get you out of paying social security and Medicare tax on this money as an added bonus.

Also since you mentioned you live in California you should be aware that California doesn't believe in HSAs. For the purpose of state income taxation you'll have to pay tax on dividends and capital gains within your HSA just like if it was a taxable brokerage account.

Jack

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Re: HSA investment questions
« Reply #10 on: April 25, 2016, 02:15:52 PM »
Thanks for the feedback. My work does offer healthcare but I do not qualify because I'm only PT (read more about me here). Because of this I go through Covered California and have the Silver plan with Kaiser. The individual deductible is high (I believe $6,000 with OOP Max at $6,500).

The dollar amount of the deductible is almost irrelevant. What matters is whether or not the plan is labeled with the words "High Deductible Health Plan." It sounds like a descriptive phrase, but it's really a classification. Even if your plan has high deductibles, it doesn't count as an HDHP unless it claims to be an HDHP.

(I'm fairly certain that when I was shopping for health care back when the ACA first kicked in, I saw plans with identical coverage and deductibles -- but different premiums -- where one was classified as an HDHP but the other was not.)

I gave Saturna a call and discussed using a HSA as a shell with a brokerage inside. However, since my employer isn't offering the HSA sounds like the money
I contribute would all be taxed and the tax-deferred benefit of all this is one of the most important ones right?

If the HSA contributions can be done via employer payroll deduction they are tax-deductible and you avoid paying FICA. If you have to contribute to the account yourself separately, the contributions are still tax-deductible, but you have to pay FICA.

Note that they're reported slightly differently on the 1040: if you get payroll deduction, then the HSA contribution is already accounted for on your W-2 (reducing the number in box 1 of your W-2 / line 7 of the 1040). If you contribute to the account separately, it will not be reflected on your W-2 but you will report the contribution on Form 8889 and 1040 line 25. (The tax math should work out the same in either case.)

Interest Compound

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Re: HSA investment questions
« Reply #11 on: April 25, 2016, 02:38:51 PM »
Thanks for the feedback. My work does offer healthcare but I do not qualify because I'm only PT (read more about me here). Because of this I go through Covered California and have the Silver plan with Kaiser. The individual deductible is high (I believe $6,000 with OOP Max at $6,500).

I gave Saturna a call and discussed using a HSA as a shell with a brokerage inside. However, since my employer isn't offering the HSA sounds like the money I contribute would all be taxed and the tax-deferred benefit of all this is one of the most important ones right? I'll double check with HR at my work to see if there's some way I could make a tax-deferred contribution to a HSA but my guess is they will not allow it.

So with all that would it still be worth pursuing a HSA?

1. When you do your yearly taxes on/before April 15th, you'll get the money back. Don't ask your employer to help you contribute money to Saturna, they are not involved in this process.

2. Read this thread:

http://forum.mrmoneymustache.com/ask-a-mustachian/stupid-hsa-hdhp-question/

It takes more than looking at the deductible max to see if your insurance plan is HSA eligible. Your plan has to explicitly state that it's HSA eligible. If you're not sure, call your insurance company. I did a quick search, and it seems Kaiser offers both HSA qualified, and non-HSA qualified Silver plans in California:

Silver 70 HSA 1500/40
Silver 70 2700/15

http://insuremekevin.com/individual-and-family-navigation/kaiser-permanente-california-aca-plans/

I'm not sure which one you choose, but it would have to be the HSA version. Also, if your company contributes to an HRA on your behalf, you are disqualified from contributing to an HSA. You'll have to waive the HRA (your company is required by law to allow you to waive JUST the HRA, yet still retain medical insurance through them) to be eligible.

braingrenades

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Re: HSA investment questions
« Reply #12 on: April 25, 2016, 03:37:00 PM »
One of the best HSA investment plans is with Wells Fargo...

Wells Fargo was the HSA I had years ago. A few years passed where I just had literally $0.01 in the account so I believe sometime last year I went to a branch and closed the account. Maybe I should consider opening that same account if possible?

Your plan has to explicitly state that it's HSA eligible. If you're not sure, call your insurance company.

Looks like my plan is a Silver 87 HMO.  I called Kaiser Member Services and they referred me to the HSA department. Spoke to someone there and they seemed to want to refer me back to member services. I told him my deductibles and he seemed to think I should qualify (even Kaiser has HSAs with options to invest).

HR is willing to sit down and talk to me about it but this whole thing seems to be getting complicated already. What would you say are the most important questions I should bring to the table when we meet?

In the meantime I'll do the suggested reading.

Interest Compound

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Re: HSA investment questions
« Reply #13 on: April 25, 2016, 04:07:44 PM »
One of the best HSA investment plans is with Wells Fargo...

Wells Fargo was the HSA I had years ago. A few years passed where I just had literally $0.01 in the account so I believe sometime last year I went to a branch and closed the account. Maybe I should consider opening that same account if possible?

Your plan has to explicitly state that it's HSA eligible. If you're not sure, call your insurance company.

Looks like my plan is a Silver 87 HMO.  I called Kaiser Member Services and they referred me to the HSA department. Spoke to someone there and they seemed to want to refer me back to member services. I told him my deductibles and he seemed to think I should qualify (even Kaiser has HSAs with options to invest).

HR is willing to sit down and talk to me about it but this whole thing seems to be getting complicated already. What would you say are the most important questions I should bring to the table when we meet?

In the meantime I'll do the suggested reading.

HR can't help you. They don't offer an HSA, and even if they did, you don't have your insurance through them so they wouldn't let you contribute anyway.