5 Hidden Pittfalls Of HSA Health Insurance Plan Exposed

If you are considering whether you should sign on to a tax advantaged HSA healh plan, and have other alternatives for your health care coverage, then this article is for you. We will quickly go over five downsides of any HSA health insurance plan that most people may not know about.

HSA stands for Health Savings Account and is a savings account that can be opened if you have a high deductible health plan (HDHP). The HSA contains your pre-tax money. The big selling point of HSA is that you can use its funds for medical expenses, and you do not have to pay taxes on such expenses. In other words, you can spend HSA money on medical expenses without ever paying tax.

Another selling point of HSAs is that you can invest HSA funds and allow them to grow, again, tax free, and even withdraw them with no penalty after the age of 65 for non-medical expenses.

If you are seriously looking to get a HSA account either as a self-employed individual, or have and option of getting it from the job, then you will want to seriously look into disadvantages of HSAs as well when compared to simply taking your money, paying taxes on it, and put it in a regular savings account with your bank.

The five disadvantages that are more or less secret for most people until they start already sign up for the plan are: high penalties on early withdrawal, bank fees, limited availability of funds, limited investment options, and, finally, real inflation. Lets look at these individually.

High penalties for early withdrawal

The HSA plans are modeled on 401(k) plans. As you may know, a 401(k) plan has an early withdrawal penalty of 10% of your withdrawn funds for early withdrawal. This is any non-qualified withdrawal before the age of 69 1/2. HSA used to have the same 10% penalty for early withdraval for non-medical expenses before the age of 65. However, this has recently been changed to 20%. Did you know about that? What if next year the congress decides 50% would be more appropriate? It is like making your money just a little bit less accessible, a little bit less "yours"!

Bank fees

Compared with regular savings accounts that you can open with most banks for free or with minimal requirements, opening a HSA will cost you bank fees which can be significant. Typical monthly fee is $3/month which translates into a loss of $36 a year, or a $1,440 loss over a typical 40 year period.

Limited availability of funds

Due to high penalties mentioned above, the funds in your HSA accout become highly immobile, and unavailable. If you plan to be healthy for the most time, you will really have no use for the funds at all. They will be usually automatically deposited into your account, and you will simply live on less money. If you want to be more flexible with your money, you need to consider this.

Limited investment options

Many banks will offer investment possibilities for the funds that are deposited in your HSA. However, as you will find out, these investments will be highly limited in scope, and your choice will usually be limited to "safe" or, in translation "low return" funds. Combined with high inflation, presented below, this is a recipe for a financial loss.

High real inflation

Although the inflation as published by the government agency BLS, Bureau of Labor Statistics, is relatively benign, about 3% a year, the real inflation that is affecting you with your own daily purchases is closer to 11%, as reported by shadowstats.com. This is simply the inflation that BLS would have reported if they used the same methodology that our government used in the 80s and 90s. Amazing. Of course, any account that holds only cash and cash-like investments, such as a HSA account, will be severely impacted by such inflation over time.

So now that you know all the five secret downsides of owning a HSA accout, compared to just having the money available in a regular savings account, you will be better able to determine if a HSA health plan is right for you. None of these five downsides will kill your HSA savings right away, but when looking to start any of the HSA health insurance plans, you need to consider the combined effect of these five downsides, which can be devastating to your finances over time.