Love them or hate them, it’s hard to see health savings accounts going out of business anytime soon. Used in conjunction with high-deductible health care plans, the accounts have been touted as a way to put downward pressure on health care costs.

Even though HSAs are the only vehicle with three tax advantages in the tax code — allowing for pre-tax contributions, tax-free compounding and tax-free withdrawals for qualified medical expenses — few HSA owners fund the accounts to the max.

HSA critics point out that the high-deductible health care plan/HSA combination is suitable for the “healthy and wealthy” but is likely to be less advantageous for lower-income workers.

But even wealthy consumers can avoid taking full advantage of their HSAs because the HSA their employer chose to go with their high-deductible health care plan just isn’t very compelling.

Here’s a closer look at how to know if an HSA is subpar and the best ways to get around it if it is.

Valuable tax benefits can come at a price

Based solely on tax advantages, HSAs seem to have the edge over other tax-advantaged savings vehicles, especially for investors who know they will have some out-of-pocket healthcare expenses down the line.

However, HSA expenses and/or deficiencies on the investment front can erode the accounts’ prodigious tax benefits. This is especially true for smaller HSA investors: not only do the fixed dollar-based account maintenance fees (say, $45/year) hit smaller HSA investors harder than those with larger balances, but interest rates on health savings accounts for smaller investors can also be lower. Therefore, it is valuable to do your HSA due diligence.

Be sure to rate the following:

Setup Fees: A one-time fee imposed at the time the Health Savings Account is created; this fee may be covered by your employer.

Account Maintenance Fees: These are fees for maintaining your account at the institution, whether it’s a bank or credit union; they can be charged monthly or annually. These may be covered by their employer, and HSA investors with larger balances may be able to bypass them altogether.

Transaction Fees: These dollar-based fees may be charged each time a person pays for services using the health savings account.

Interest rate on savings accounts: Many HSAs offer lower interest rates on smaller balances than they do on larger ones; that—combined with the fact that account maintenance fees tend to hit smaller HSA savers harder than larger ones—makes the case for building and maintaining critical mass in HSAs, to the extent that you use one.

Investment Options: Evaluate the range of investments offered to ensure they align with your investment philosophy. Many HSA investment lines lean heavily toward low-cost index funds, but others feature primarily actively managed funds, often with higher expenses.

How to transition from a weak HSA

If you’ve done your homework on your employer-provided HSA and found it lacking, you have three distinct options.

Option 1: Contribute to an HSA on your own

As long as you’re enrolled in a high-deductible health care plan, you’re technically free to choose another HSA instead of directing your contributions into an employer-selected HSA.

You can then deduct your HSA contributions from your tax return. However, this is more cumbersome and requires more discipline than directing a portion of your paycheck directly into your “captive” HSA.

Additionally, HSA contributions made under a salary reduction arrangement in a Section 125 canteen plan are not subject to Social Security and Medicare taxes, while those taxes will come out of your paycheck even if you ultimately you get to divert those dollars to your own HSA.

For these reasons, forgoing payroll deductions for an HSA is usually not the best option.

Option 2: Transfer money from your employer-provided HSA to another HSA

With this strategy, your HSA contribution is deducted directly from your paycheck and sent to your employer-provided HSA; you can then periodically transfer all or part of that balance to an external HSA of your choice.

There are no tax consequences to HSA transfers, and you can make multiple transfers per year.

The employee can contribute enough to the savings account to cover anticipated out-of-pocket healthcare costs, but direct any excess funds into an HSA with better investment options.

Option 3: Transfer money from your employer-provided HSA to another HSA

This strategy is similar to option 2.

Contribute to your employer-provided HSA through payroll deduction, then transfer the money to an HSA provider of your choice.

There are, however, two key differences between a run and a transfer.

The first is that, unlike a transfer, where the two administrators handle the funds and leave you out of it, a transfer means you get a check for your balance; you must deposit that money into another HSA within 60 days or it will be considered an early withdrawal and a 20% penalty will apply if you are not yet 65 (or if you do not have receipts to cover medical expenses equal to your withdrawal amount).

Another key difference is that multiple transfers between HSAs are allowed, but you’re only allowed one HSA transfer per 12-month period.

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This article was provided to The Associated Press by Morningstar. For more personal finance content, visit

Christine Benz is director of personal finance and retirement planning at Morningstar.

Related links:

HSA vs. FSA: How to choose one: /hsa-vs-fsa-how-choose-one

How I invest my health savings account: /how-i-invest-my-health-savings-account