Health Savings Accounts, or HSA’s. Everyone seems to love them, and feel like they’re a miracle account.  Believe it or not, despite people telling you how great the HSA is, it’s not actually right for everyone all the time. You need to be able to do some analysis on your personal situation to see if an HSA is right for you.

Today I’m going to talk about the mistakes I’ve seen others make when deciding whether to open an HSA, so hopefully you won’t make the same mistake.

But Aren’t HSA’s Always Great?

No, not always.

Now, I know – you’ve already read The Mad Fientist’s article about how the HSA is the ultimate retirement account.  Yes, it’s a great type of investment account.  But it’s not the best option for everyone all of the time.

For example, while reading an online financial forum a few months ago I saw a poster asking about his HSA situation. Apparently, his spouse has an excellent, low-cost, low-deductible (or perhaps no deductible?) plan. This poster was asking if he should pay thousands of dollars extra out of pocket for his own, separate, worse insurance so he would have the opportunity to contribute to an HSA. That insurance was both more expensive for monthly premium, and more expensive in terms of medical costs.

If you’re not familiar with an HSA, it’s an account that you can save into in order to cover medical expenses. You have to have a high deductible medical plan in order to be eligible. It’s a triple tax advantaged account – money goes in tax free, it grows tax free, and you can withdraw it for medical expenses tax free. If you withdraw it before 65 for non-medical expenses, you pay a 20% penalty. After 65, you don’t pay the penalty but you do pay tax on the withdrawals if they’re not used for medical expenses

I’ve seen variations on this same question repeatedly over the last few years. There’s always someone – a poster on a forum, a commenter on an article, or a person calling into a podcast – that wants to get access to an HSA at all cost.  And they think it’s going to be worth paying more out of pocket for their insurance to do so, in higher premiums or higher total medical bills (or both).

Every single year, I get to decide between an HRA (Health Reimbursement Account) plan and an HSA plan at my work. Since I know the benefits of an HSA, I always look closely at that plan option. But it has several significant disadvantages over the HRA plan for my family:

  • It costs about the same
  • The company contributes less money to the HSA than to the HRA
  • The HSA plan has a higher deductible and higher out of pocket maximum than the HRA

The last two points aren’t applicable to a single young person, or to someone who has a very healthy family. But they very much matter to a family that has experienced a horrible medical crisis that continues to reverberate in our lives to this day. I hit my deductible every year, and I’ve hit the out of pocket maximum several times.

If you’re not familiar with those terms, the deductible is how much you need to pay out of your own pocket before the health insurance starts to pay anything. The out of pocket maximum is the total amount you may need to pay every year – after you hit that, you’re in what I call the “double bonus round” where all – 100% – of your health care costs are covered by your insurance company. 

This is why personal finance is personal. You can’t just listen to generic advice that works well for someone with a particular financial (and medical) situation. You need to sit down to run the numbers for yourself, for your own life, and your own reality.

This is because of one powerful concept I’ve heard many times before on the Bogleheads forum.

Money is Fungible

What does that mean? Well if you’re simply taking money from your left pocket and putting it in your right pocket, nothing changed in your overall financial picture. If you “save” $1,000 in a savings account but need to put an extra $1,000 on your credit card to do that, you didn’t really save anything. Your net worth is still zero.

The same is true of paying more for the honor of having an HSA plan.

How so? Let me do some math with you. That’s what everyone needs first thing Monday morning, some math.

Grab your abacus! 

Let’s say you can save $2,000 into an HSA, Since the HSA contributions are tax deductible, saving $2,000 doesn’t cost you exactly two thousand dollars. You have to calculate how much it really costs you after you take out the tax savings (and the FICA tax savings, if you get the HSA through your employer). If you’re in the 25% marginal tax bracket, pay social security tax of 6.2%, and Medicare tax of 1.45%, saving $2,000 really only costs you $1,347. The actual amount might be lower depending on whether you get state tax savings, or higher if you don’t contribute to an HSA through your employer.

Contribution $2,000.00
Federal Tax Savings $500.00
Social Security tax savings $124.00
Medicare tax savings $29.00
Total out of pocket cost $1,347.00

So with the HSA you’re paying $1,347, and at the end of the year you have $2,000. That $2,000 can now grow tax deferred and eventually may be able to be taken out tax free.

Now, lets say that in your case, the health insurance plan option with an HSA is going to leave you worse off financially. The premium is higher, your medical expenses are higher, and/or your deductible is higher – all causing you to pay more out of pocket this year for the privilege of having access to an HSA.

How much extra would you have to pay before having the HSA is going to leave you, in total, financially worse off? $654 – the amount you saved on your taxes, plus a dollar. Once you spend that six hundred fifty fourth dollar, you now officially haven’t saved anything over opting for a ROTH.

 Your Contribution $2,000.00 $2,000.00
Your Real Cost After Tax Savings $1,347.00 $2,000.00
Extra costs you pay $653.00 $0.00
Total real cost to you $2,000.00 $2,000.00

Why is that? Remember, money is fungible. If you take the less costly option, you can take the extra money you saved and use it to invest into the Roth IRA. The Roth is not tax deductible, but instead grows tax deferred and can be taken out tax free – just like the HSA. And unlike the HSA, it can be used tax free for anything upon withdrawal. This benefit starts at 59 and a half, not 65.

So the net effect on your wallet – the real cost for making this investment choice – is exactly the same. As soon as you have to spend $654 or more for the privilege of an HSA, you are – in total – financially worse off.

I’ve found a lot of people just don’t understand this concept. Instead they mentally bucket their money into different categories. That’s why people don’t get that investing $5,500 into a Roth and investing $5,500 into a 401k is not the same. Investing $5,500 into that Roth really cost you $5,500 of your net income, but you have to invest $7,333 into a 401k for it to cost you $5,500 (assuming again 25% tax bracket).

Other Potential HSA Pitfalls

When you’re running your own calculations, you need to be on the lookout for other potential HSA investment pitfalls. Why? So you can do a real, mathematical comparison between your plan options. Here are 3 other pitfalls to look out for

  • The cost of the plan – This is going to depend on your employer. Many employers offer an HSA through one specific company. You need to check out how much that company charges for the privilege of having an HSA. There may be a flat fee per month/year. Perhaps there’s a fee that increases with your account balance. Or it could be there’s an account fee as well as additional investment fees. Look closely at the fees you’ll be paying when deciding if this is a good option for you
  • Hidden cost of the plan – Also called cash drag. Many HSA providers require you to keep a specific dollar amount in cash. This is fine if you’re using it for ongoing medical expenses, but not so great if you’re using it as a retirement account. Be sure to know if this is the case for your plan
  • Investment options – Some HSA providers have great investment options, including index funds. But others don’t. Some are chock-full of poorly performing actively managed funds. Take a close look at what options are available to you to see if they’re good – or not so great.

A Word About The Great Unknown

Medical expenses.


No one really knows how much they’re going to pay in medical expenses during the year. If you’re young, healthy, and single, you probably think you’re maybe going to pay a few hundred dollars – if that. If you’re older, less healthy, or have a family, you probably expect to pay more. This is unfortunate, because the amount you have to pay in medical costs is usually a key part of the calculation.

Being young and healthy is no guarantee that nothing will go wrong. I have a high school friend who passed away in his early 30’s of brain cancer – only a few months after the birth of his daughter. A friend of my husbands, the single mother of two young kids, passed away a few years ago at 40 from blood cancer. And my husband almost died of septic shock at 37, when I was 31. So unlike many others my age, I’ve very much aware that an extreme medical crisis can hit at any time.

Just remember that whenever you’re making these calculations, the medical expenses are the part where you just don’t know what will happen. I would recommend calculating three scenarios – “best case”, “average”, and “worst case” – when deciding which plan option is right for you.

It’s Not All Bad

Lest you think I’m an HSA hater, I’m really not. I think it can be a fantastic option for some people – and the triple tax advantage can be very powerful. Here are seven times it might be a great option for you:

  • You’re already maxing out other retirement account options
  • You have great investment options in your HSA, with low costs
  • You don’t expect to have a lot of out of pocket medical costs
  • The HSA plan is not more expensive than the alternative
  • You don’t have any alternatives
  • You’re self employed, and forced to get a high deductible plan
  • You’re not eligible for a Roth

If I’ve missed some other times when an HSA is a great option, let me know in the comments.

The Lesson

There is no such thing as a perfect investment option. Each way you choose to spend or invest a dollar of your money has pros and cons. This is why it’s important that you educate yourself, look closely at the options available to you, and run the numbers for yourself in your own situation. You might just be surprised at the outcome.

What do you think about HSA’s? Have you ever run the numbers for yourself? What are other disadvantages I might have missed? Let me know in the comments.

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25 thoughts on “When Good Financial Ideas Go Bad – HSA’s

  1. Great article. HSA’s are incredible for the right person, but if you’re using your health insurance as a subsidy to your healthcare costs as opposed to as insurance, HSA’s usually don’t make sense.


    1. Yes they can be fabulous investments for the right situation, but you need to do the math. If you’re dealing with medical problems or chronic conditions they might not be the best option.


  2. I agree with this completely. I wrote an article about how much I loved my HSA, but this year we switched over to a higher premium plan with a lower deductible and lower out of pocket max, as we anticipate some higher medical costs in the near future. Once those costs die down we may switch back, but it is no use saving extra if it is going to cost more than the savings.

    Liked by 1 person

  3. I’ve totally gone through this analysis…. After getting married last summer, we did the math with all the variables and me going on his health care plan was the best alternative for a lot of reasons even though I was now walking away from the HSA tax advantages since his company didn’t even offer an HSA. My company’s HSA plan administrator had so many ridiculous monthly fees associated with the account, that I decided to go ahead and get reimbursed for several years of health care expenses and close the account altogether once I depleted it completely (and invested those reimbursements in my taxable accounts). The fees were pretty outrageous and honestly, another big component was simply choosing to simplify my life with one less restricted account.

    Liked by 1 person

    1. Ugh I hate bad HSA’s! Some companies have great ones, but others are just terrible. Sometimes the tax advantages just don’t outweigh the additional cost/hassle. It also might not even be worth it, like you found in your analysis.


  4. I will say though the difference was mostly in the actual cost of regular predictable care needs which made the analysis easy. I agree that the bigger picture is to not follow financial advice blindly without doing the math. Sometimes I feel like folks get caught up in “tax advantages” without checking what they really are. I had someone tell me once, “I refinanced for a lower rate but I won’t get as many deductions so it won’t help me as much on my taxes.” I politely explained the math to her and how she was still much better off (in this case it was moving from 5% ish to a 3% mortgage rate) but it was a stark reminder that financial literacy is lacking. 🙂

    Liked by 1 person

  5. You make many valid points, CMO! Ironically, I wrote an article today touting the benefits of HSAs 🙂

    In my post, I discuss the risks and the target audience that HSAs are not good for – much of that aligns with your post. A few points I have.

    First, I haven’t seen HSAs that are the same cost as other options. They are generally MUCH more inexpensive on the monthly premium side. However, my scope is limited to my network and the employer I have. Second, HSAs offer a QUAD tax-advantage because direct deposit contributions to an HSA are not subject to FICA taxes. Finally, and I’d have to research this thought further, most HSA plans allow you to select the bank you want to host your HSA. Thus, you have more flexibility in finding a bank that has lower-cost investment options.


    Liked by 1 person

    1. At my company two of those aren’t true-we can’t pick the bank, and the plan isn’t that less expensive. Sometimes, too, if you’re comparing one spouses plan to the other you can get a non-HSA plan for less premium. And that direct deposit advantage is true, but only if you get the HSA through your employer. I would say that most HSAs don’t let you choose the bank unless you’re buying outside your employer.


  6. We haven’t had a low deductible plan option with my employer in a few years. That being said what I remember was there was sort of a donut hole approach. The low deductible made sense for spend between the deductible of that plan and the out of pocket max for a high deductible plan. After that the hsa pulled ahead in our case. Be sure to run your scenario for your expected spend as it’s not clear cut.

    Liked by 1 person

    1. The hardest part, I think, is knowing your expected spend. Especially when you have kids it seems like they’re randomly getting into one disaster or another. Plus with my husbands health we can rarely project accurately. But each year the HRA (which is still a high deductible plan-$3250) comes out ahead in my calculations. Mostly because my employer contributes more to the HRA than the HSA, and the deductible is lower.


  7. I am a small business owner. It is a medical practice. A high deductible plan with a hsa would probably be good for me but my lower income employees would be upset.

    Liked by 2 people

    1. Good point, that’s also true where I work. We have high income employees that can take the HSA and use it for investing-but thousands of others who make $30-$40k per year for whom the deductible is about 10% of their annual take home pay. The could never afford to fund an HSA and just let the money grow.


    1. Glad to hear it’s worked out well for you! I know sometimes they’re a great option, but other times the math just doesn’t work. I’ll keep my fingers crossed that the math continues to work in your case!


  8. My previous company tried to force everyone from the PPO option to the HSA option. They did this by showing a cost analysis of both plans, and showed that the PPO was about $6,000 more expensive than the HSA per year. What they didn’t overtly state was that in the calculation, they included the cost of the premiums in the calculations for the PPO cost, but not the HSA cost.

    For me, I actually prefer comprehensive healthcare plans over bare bones ones similar to what HSAs provide. My old HSA cost me $50 (employer paid $150) a month AND my employer put $750 per year into my HSA account. But every single time I went to the doctor, it cost a fortune. I had bloodwork done to help diagnose the pain in my hands, and it cost $2,500. I ended up paying my entire deductible for that.

    Now, I have an excellent PPO. It costs $10,000 per year and I pay $3,600 per year in premiums (employer covers the rest). However, $0 deductible and $1,500 out of pocket max. Bloodwork is always 100% covered, and maximum prescription cost is $20. Even though I’m paying more in premiums now than I did premiums + deductible on my old HSA, the knowledge that I’ll be covered for pretty much anything helps reduce my anxiety so it’s a win for me.


    1. I’m with you – HSA’s can be great if you never go to the doctor except for a checkup. But if you have a high deductible plan, any small medical event – including bloodwork or an MRI – can be a financial disaster. Especially if you have a very high deductible or out of pocket maximum, like I do.


  9. I’m glad that you are giving a real example of an HRA plan. Most people talk only about HSA-eligible (w/ high deductible) and the more traditional PPO/POS plan without. I agree you have to compare all the factors including your premium costs, expected deductible, OOPMs if the shit really hits the fan, and any costs that don’t count towards those deductible/OOPMs like certain copays.

    With an HRA, the draw back is that you can’t take the money with you if you are thinking about leaving that employer any time soon. (That’s a key advantage for your employer, BTW. They don’t have to actually fund your HRA with real dollars until you use it. With an HSA, if they give you a hand, they have to transfer you real cash). If you like your employer and think you’ll stay for many years and everything else points to the HRA being better for your situation, then it makes sense like for you guys. But for those who like to trade up jobs frequently, you’ll walk away from any unspent HRA funds. Would that you encourage you to ‘hurry’ up and spend it before you leave?

    We don’t have HRAs at our jobs and have found the HSAs to be a great saving tool for us – but we also have low medical costs.

    Liked by 1 person

    1. The great thing about the HRA not being funded with real money is that you can use it all, leave your employer, and they can’t get the money back. So in job switching it could be an advantage (if you have front loaded medical costs) or disadvantage (if you don’t). Then you can get a new HRA or HSA with your new employer. The same is true of the FSA, actually. The bad part is that you can’t build up a large HRA fund like you can the HSA. Sometimes you can roll it over year to year but sometimes not.

      Liked by 1 person

  10. I’m happy that you shared this post! I just recently learned about HSA’s and it just happened to be from Fientist. What are the chances lol.

    At first I thought this would be great to have because of the benefits but I didn’t dive right in. I felt like I needed do more research to make sure if this is something that’s right for me.

    Liked by 1 person

    1. Yes they can be a great idea, but you really have to run to numbers to make sure it makes sense for you, your family situation, and your expected expenses. If you do the research and run the numbers, and it works well, great! But they’re really not perfect for everyone all the time.


  11. New follower of your blog, awesome info!

    Recently my employer decided to contribute to our HSA up to the deductible amount every year. Not sure if other employers do this as well, but it made the choice of going with the HDHP+HSA a no brainer since the premiums were much lower than the standard PPO/HMO plans.

    Regarding the Deductible vs. Out of Pocket Max (OOPM)…after hitting the Deductible, wouldn’t it be difficult to reach the OOPM? What charges would be paid OOP afterwards? I never got a clear answer on this because so few folks have reached OOPM. Thanks!

    Liked by 1 person

    1. That’s an amazing deal! Definitely not something all employers do (some don’t contribute a dime!) but you’re right to take such advantage of a great deal.

      After you hit your deductible, the insurance company starts paying for a portion of your claims-but only a portion. How much depends on your employers plan. So they might pay 80% but you need to pay the other 20%. That continues until you’ve paid the out of pocket max. After you hit that, the insurance company covers 100% of all claims and you pay 0. I call it the “double bonus round”. 😄

      Liked by 1 person

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