Just in time for benefits-enrollment season, health savings accounts are getting a big push from your local bank.
Nearly 1,100 banks now offer the tax-favored spending accounts, more than triple the number at the end of 2005, according to market-research firm Information Strategies Inc. The growth comes as more employees enroll in high-deductible health plans, which are paired with health savings accounts, or HSAs, to help pay for the deductible and other out-of-pocket medical costs. But savings not needed to pay medical expenses can accumulate in a HSA for years, and this has sparked bank interest in offering such accounts.
The abundance of new HSA offerings is triggering competition that is helping to push fees lower and expanding the options for consumers to invest their savings. Most HSAs previously earned interest, sometimes at relatively low rates. Now, banks increasingly are offering other investment options, including mutual funds, if consumers have a minimum required balance.
Among other options: Bank of America Corp. is expected to announce this week that it will introduce a new credit card, in partnership with major health plans, that will let holders earn rewards points that convert automatically into cash in their HSAs. And in January, the bank's customers will be able to invest their HSA balances in mutual funds offered by the bank's Columbia Management arm.
J.P. Morgan Chase & Co., which previously marketed its HSAs primarily through employers, will begin later this month to allow individuals to enroll for the accounts online. The bank also offers mutual-fund investments to its HSA holders.
The abundance of new offerings means consumers interested in a HSA need to shop around. The accounts vary widely in their structure and fees. Initial setup charges are $10 to $20 at Chase, for instance, but free at U.S. Bancorp. Ongoing monthly fees are $4 at BB&T Corp., but free at Huntington Bancshares Inc. Not all banks disclose the fees on their Web sites, while others make the information frustratingly hard to find.
It doesn't help that interest rates paid on the balances in HSAs vary widely. HSA Bank, of Sheboygan, Wisc., which specializes in health savings accounts and has customers in all 50 states, pays 1.98% interest on an average daily balance of $1,000, although rates are higher for bigger balances. Chase's current rate is 4.11%, regardless of the balance, while Bank of America pays 2.96%. Some banks offer a tiered system, including BB&T, which pays 1.49% for balances up to $2,499. That jumps to 4.47% for balances of $25,000 and greater.
The widening availability of HSAs is expected to help propel the total number of accounts by year end to about 3.6 million, holding $5 billion in combined deposits, according to Information Strategies. That's up from 1.1 million accounts and deposits totaling $1.2 billion at the end of 2005. The accounts are fairly new -- Congress first authorized them in 2003 -- so the number of account holders is still a small proportion of health-plan enrollees overall.
HSAs are funded with pretax money, and income continues to grow tax free. What's more, account holders don't have to pay taxes on withdrawals as long as the money is used for qualified medical expenses. However, withdrawals to pay for other expenses are taxed, and the account holder will likely also have to pay a penalty. Because the penalty disappears after an account holder turns 65, HSAs are increasingly being used as a tax-deferred savings vehicle to help cover both medical and non-medical expenses in retirement.
To qualify to open an account, you must first be enrolled in a high-deductible health plan, which typically charges the consumer a lower premium than plans that have smaller deductibles. About 75% of all HSAs have been opened directly by consumers, but that percentage is expected to slide as more big companies begin adopting the high-deductible health plans to help reduce soaring costs of health-care benefits. Some employers pay fees and make contributions into HSAs for their workers.
Early offerings of HSAs were led by niche banks catering to small-business owners wanting to offer some health-care options to workers while watching the bottom line. Now, bigger banks are increasingly getting into the business, attracted by the lucrative combination of deposits, account fees and sales leads for mutual funds and other investments generated by customers. In turn, the presence of big banks in the industry is expected to quickly spread awareness and hasten the adoption of HSAs, experts say.
"We think it's going to be a great opportunity," says Karen Hill, vice president in the consumer-product management group at KeyCorp, a Cleveland bank with branches in 13 states that will start offering health savings accounts by year end. And Huntington Bancshares, in Columbus, Ohio, will promote its new health savings account, to be launched early next year, to business customers interested in offering them to employees. Individuals also will be able to open an HSA on Huntington's Web site.
Industry officials say improvements are still needed with HSAs, especially in areas such as customer service. For instance, many banks offer debit cards that HSA holders can use to make purchases. Most of these cards, however, aren't able to track whether charged expenses are qualified to count toward a health plan's deductible. This can be a big headache for customers stuck monitoring their spending and holding on to receipts in order to avoid federal penalties on nonqualifying purchases. One new debit-card offering, planned by KeyCorp for early next year, will include an optional feature that allows consumers to restrict the card's use only to health-care providers and pharmacies.
