Understanding HSA Custodians: Roles, Costs, and Benefits

What Is an HSA Custodian?

An HSA custodian is an Internal Revenue Service (IRS)-approved financial institution that opens and holds a health savings account (HSA) and manages its administration.

Custodians can be banks, credit unions, insurance companies, and brokerages. Many offer investment options alongside the HSA's tax advantages for qualified medical expenses. Fees vary by provider and may include maintenance, transaction, plus investment-related costs.

How to Open an HSA Account: A Step-by-Step Guide

1. Employer Enrollment: Check if your employer offers an HSA. If enrolled automatically, inquire about the current custodian and the possibility of switching. 
2. Evaluating Impacts: Ask the HR department about how choosing a different custodian could affect payroll deductions. 
3. Direct Enrollment: If opening privately, research and select an HSA custodian that aligns with your financial goals by considering interest rates, fees, and investment options.

Understanding the Role of HSA Custodians

Health savings accounts were created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 to offer individuals with high-deductible health plans (HDHP) tax-preferred treatment of the money they save for medical expenses.

An HSA custodian makes it possible for individuals to contribute to an HSA and withdraw funds as needed to pay medical bills. Similar to a savings account, custodians pay interest on cash balances held in the HSA account. Some financial institutions let account holders invest in stocks, bonds, and funds for potentially higher rates of return on the money they don’t need to pay for medical expenses in the short term.

Fees and Costs Associated With HSA Custodians

HSA custodians charge fees for their services. Fee types and amounts vary by the custodian institution. Some basic, ongoing fees you might see include an annual administrative flat fee and a quarterly custodial fee calculated as a percentage of your account balance. There are also fees you can incur if you make mistakes, such as an excess contribution correction fee if your deposit exceeds the IRS annual limits for HSA accounts.

There may also be fees to issue additional debit cards to family members or to replace lost or stolen debit cards. HSA custodians also charge many of the same fees that checking accounts charge, such as insufficient funds fees, account closure fees, and stop payment fees.

Example: Maximizing Savings with an HSA Account

Individuals may use their HSAs to lower their monthly premiums. Let's say someone currently has a low $2,000 deductible for their family coverage. In this case, the monthly premiums may be a relatively costly $800 per month. However, if that monthly deductible spikes to $5,000, then the monthly premium may shrink to as low as $500, saving $300 per month, essentially allowing them to pocket an extra $3,650 per year.

The Bottom Line

HSA custodians are IRS-approved organizations that offer HSAs and handle the account's administration plus safekeeping.

Choosing the right custodian can affect interest earned, investment options, plus the fees you pay, including administrative and custodial charges. With the right setup, an HSA can deliver tax advantages while helping cover qualified medical costs, plus, in some cases, certain premium payments.