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How to start a Health Savings Account

by Tony Novak, CPA, MBA, MT
, revised 11/28/11

Editor' s Note: This article was revised on 3/19/04 and again on 8/22/04 to reflect changing industry norms. An article "How to Open an Assurant Health Savings Account" was also published with specific details on how to open a health savings account with that popular company that handles both the insurance and account together.

There are two ways to open a health savings account: either in conjunction with a HSA-qualified insurance plan or separately from the HSA-qualified insurance plan. The first option is easier, faster and cheaper but in some cases the second option may be preferred. This article details the steps to be taken in either situation. In either case, an enrollment in a HSA-qualified insurance plan is a prerequisite.  

Combined Accounts

Most health savings accounts (HSAs) are opened and administered free of charge by the same firm that offers the HSA-qualified insurance. Besides the free service, there are other reasons to keep your HSA account with the same firm as your insurance. First, you get discounts on covered medical expenses that are lower than the policy deductible. Second, the claims pass through the same screening process as regular claims, so there is less chance of unauthorized charges, over-billing or duplicate billing. These issues can become major headaches for unattached HSA accounts. Third, the insurance-based HSAs tend to avoid the problems that plague the debit card type health plans because they use a more secure withdrawal method.

Using this method, all of the enrollment materials will be provided and handled by your enrollment service as soon as the qualifying insurance is approved. See www.freedombenefits.net for details on UnitedHealth and Celtic Insurance that are commonly issued as a combined HSA accounts.

In most states online enrollment is easy and live support is free. For the eight states not covered by national carriers, OnlineAdviser^TM offers supplemental service for a fee to assist with other HSA plan pricing and enrollment enroll by mail.

Separate Accounts

You may want to open a HSA account directly with a bank not affiliated with your qualified health insurance. A few specialized banks offer this service. This article details the procedures for opening an account with State Bank of Howard Grove, one of the nation' s leading banks offering this custodial service under the brand name "HSABank" and HSA Administrators, an industry leader using Fidelity no-load mutual funds.  Other banks or financial firms may be available but these are two of the larger and most likely choices.

First, realize that most high-deductible health insurance plans in force today are not HSA-qualified. If your insurance policy was issued before January 2004 and not updated this year, then the policy almost certainly does not qualify. You must either enroll for a new HSA-qualified health plan or confirm with your health insurance company that the plan is actually being administered under IRS requirements for HSA plans. An insurance company offering an HSA-qualified plan needs to adhere to the IRS reporting requirements that makes policyholders eligible to take the HSA deduction. It would be useless to open an HSA account if the insurance is not officially HSA-qualified because the tax deduction would be disallowed. The IRS used a process called "matching" similar to the audit procedure used by the IRS for determining eligibility for IRA account deductions. Generally those that do not "match" are sent tax adjustment letters and then the burden is on you to prove eligibility for the deduction. Avoid this mess by verifying your insurance company' s procedures before opening a HSA. (More detail on this topic can be found of the FAQ page at www.healthsavingsaccount-hsa.com). 

If you are using a recently updated health insurance plan, get a copy of the HSA-qualified status letter or make a copy of the policy declaration page with the words "Qualifying High Deductible Health Plan. Save this copy to attach to the HSA-qualified plan to your HSA account application below. The bank may or may not request this eligibility document, but it makes sense to attach it with the initial HSA application to save time later.

If you do not have a written statement of eligibility it might be possible to open a HSA "at your own risk" as long as the bank or trustee does not require this document to open an account.

Download and complete one of the HSA account application forms at http://www.healthsavingsaccount-hsa.com/hsaaccounts.htm . The application instructions are self-explanatory and a toll-free number is included on the form to help with any other account questions.  A chart summarizes the key differences between the HSA account administrators.

Mail the HSA account application form with the initial deposit and account fee (if any) to the address listed on the forms.

Next, you may wish to enroll in a separate PPO discount plan for medical, dental or prescription expenses. HSAs work best and are more efficient when you pay the lowest prices for medical care not covered by insurance. Since your smaller health care claims will not be adjusted by the HSA custodian, it is important to arrange for that service on your own. If you charge the cash price of health care expenses directly to your HSA account, you would wind up over-changing your own account by 20% or more, depending on the nature of the charges. See www.ehealthdiscountplan.com for more details. These plans usually cost less than $200 per year and should be money-savers even for healthy households.

Finally, small businesses should consider combining a HSA plan with a Health Reimbursement Arrangement (HRA) or Flexible Spending Account (FSA) to save taxes and help comply with employee benefit plan rules. While these other health plans cost a few hundred dollars per year to administer, they can result in much greater savings for an employer than an HSA plan alone. More information about employee health plans is available online at www.FreedomBenefits.org.

Avoid common mistakes by following these tips:

• Consider the insurance limitations on pre-existing medical conditions in advance. HSA plans are meant for individuals without significant medical issues. These plans are not cost-effective for covering normal maternity expenses or for high risk applicants.
• Be realistic about insurance pricing. These plans average about 30% less than full coverage HMOs but still more expensive than mini-med plans. If the price of health insurance is the primary concern, HSAs plans may not be the best option. See Freedom Benefits for a listing of lower priced health insurance plans.
• Do not assume that your health insurance is qualified unless the insurance company specifically says so in writing.

  The following consumer warning was relevant at the time the article was originally published but may not be important anymore:

  "The overwhelming majority of high deductible health insurance plans available today are not HSA-qualified. Avoid the common mistake of assuming that you can convert your current health plan to an HSA-qualified plan without enrolling for a new health insurance plan. Not everyone is eligible to change health insurance plans. Generally, if you can not change health insurance plans then you will benefit from a health savings account".

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