The Hidden Cost of HSA Minimum Cash Balances
If you have a health savings account (HSA), you’re probably familiar with the minimum cash balances many account holders face. These minimum balances are typically $1,000 or $2,000, which means account holders must keep that amount in their cash account before they can invest additional funds.
You may also have heard minimum cash balances explained as a way to make sure account holders have sufficient funds on hand to cover a medical emergency. In other words, minimum cash balances are a safeguard to ensure you never get caught empty-handed when you need to pay out of pocket for a medical expense. However, rather than benefiting account holders, minimum cash balances act as a hidden cost by holding funds captive and limiting account holders’ ability to invest.
The Problem: Minimum Cash Balances’ Unseen Cost
For example, let’s say you had $2,000 of HSA funds to invest and earned a 6% annual return on those funds. At the end of the year, you would have $120 in returns. However, if your HSA has a $2,000 minimum cash balance, your funds couldn’t be invested; they would have to stay in a cash account. And, most HSA cash accounts have interest rates of only 0.25% or less for a $2,000 account balance.
If your HSA provider has a 0.25% interest rate, you would earn just $5 in interest from your $2,000. If you subtract that $5 of interest from the $120 you could have made by investing your funds, you are left with $115 of unrealized potential. While not an actual fee, that $115 is an opportunity cost based on your inability to invest your $2,000.
But what about maintaining a cash account balance to pay for a sudden medical emergency? It turns out there are very few occasions where you will incur a medical expense that will require you to immediately pay $1,000 or $2,000 at the time of care. This means that if you end up needing unforeseen medical care, you should have plenty of time to move assets from your investment account to your cash account to pay for those services.
Most HSA providers can transfer your assets from investments to cash in a matter of days, allowing you to stay on top of any medical charges you might face. And even if you do face a sudden medical bill that exceeds your cash account balance, you can always pay out of pocket and reimburse yourself from your HSA for that expense. HSA account holders should seldom face a situation that makes maintaining a cash account balance necessary.
The Solution: First-Dollar Investing
Unfortunately, minimum cash balances are still a reality for the majority of the HSA industry. However, there are a few providers who offer first-dollar investing and don’t require their account holders to reach a certain cash balance in order to begin investing. These providers understand HSAs’ value as a long-term investment vehicle and work to remove all barriers that might prevent account holders from growing their money.
In addition, these providers understand that while using HSA funds to pay for current medical expenses is sometimes necessary, investing those dollars to take advantage of their tax-free growth is the wiser choice. The average couple retiring at age 65 in 2019 is expected to face $387,000 in out-of-pocket medical costs, and having a medical nest egg of tax-free HSA funds to cover those expenses is a very prudent move.
Due to their unparalleled tax advantages, investment-focused HSAs are the hands-down choice for savvy investors looking to maximize tax savings on their retirement medical expenses. And by allowing you to invest from your very first dollar with no minimum cash balances, HealthSavings maximizes your ability to grow your funds and create a happy, healthy future.
If you’d like to learn more about investing your HSA, you can check out our industry-leading Investor Focus HSA fund lineup. Or, if you’d like a visual reminder of minimum cash balances’ impact, download our one-page infographic here.