What Is an HSA Custodian and What Do They Do?
Learn what an HSA custodian does, the types of institutions that serve as custodians, associated costs, and key factors to consider when choosing one.
Health Savings Accounts (HSAs) offer a tax-advantaged way to save for medical expenses, but they require a financial institution to hold and manage the funds. This entity, known as an HSA custodian, ensures that contributions, withdrawals, and investments comply with IRS regulations. Choosing the right custodian affects fees, investment options, and account management.
Custodian’s Main Responsibilities
An HSA custodian ensures compliance with IRS rules, processing contributions within annual limits. For 2024, individuals can contribute up to $4,150, while families can contribute up to $8,300. Those 55 or older can add a $1,000 catch-up contribution. Custodians track and report these amounts to the IRS and account holders using Form 5498-SA.
They also handle withdrawals, issuing Form 1099-SA to document distributions. While custodians do not verify whether withdrawals are for qualified medical expenses, the IRS imposes a 20% penalty plus income tax on non-medical withdrawals unless the account holder is 65 or older, disabled, or deceased.
Some custodians provide investment options such as mutual funds, stocks, or ETFs, allowing account holders to grow their balances. However, not all offer these options, and those that do may require a minimum cash balance before investing.
Types of Custodian Institutions
HSA custodians include banks, credit unions, and trust companies, each offering different features affecting interest rates, investment opportunities, and fees.
Banks
Banks commonly serve as HSA custodians, offering FDIC-insured accounts that protect deposits up to $250,000 per depositor. Most structure HSAs as interest-bearing savings accounts, though rates vary.
A major advantage of banks is easy access to funds through debit cards, online bill pay, and mobile banking. However, investment options are often limited, making banks a better fit for those prioritizing liquidity and security over investment growth.
Credit Unions
Credit unions offer similar services but operate as not-for-profit institutions, often providing lower fees and higher interest rates. Deposits are insured up to $250,000 per member through the NCUA.
They emphasize customer service and financial education, helping members maximize HSA benefits. However, membership may be restricted based on employment or location, and investment options are often limited.
Trust Companies
Trust companies specialize in asset management and typically offer a broader range of investments, including mutual funds, ETFs, and individual stocks. This makes them appealing for those using an HSA as a long-term investment vehicle.
However, they may require higher account minimums or a portion of the balance to remain in cash before investing. They also tend to charge higher fees for account maintenance and investment management. These custodians are best suited for individuals comfortable managing investments and accepting market risks for potential growth.
Costs and Fees
HSA custodians charge varying fees based on the services offered. Some provide fee-free accounts, while others charge for maintenance, investment management, or specific transactions.
Monthly or annual maintenance fees typically range from $2 to $5, though some institutions waive them if a minimum balance is maintained. Investment-related fees may include mutual fund expense ratios, stock or ETF trading commissions, and advisory fees.
Additional charges can apply for wire transfers, paper statements, or check issuance. Electronic transactions are often free, but requesting a physical check or expedited processing may incur a fee. Overdraft or insufficient funds fees may also apply.
Application and Account Setup
Opening an HSA requires selecting a custodian that aligns with financial goals, whether prioritizing low fees, investment flexibility, or integration with an employer’s benefits platform. The application process typically involves providing a Social Security number, employment information, and valid identification.
Eligibility depends on enrollment in a high-deductible health plan (HDHP). For 2024, an HDHP must have a minimum deductible of $1,600 for individuals and $3,200 for families. Custodians do not verify eligibility, so account holders must ensure compliance to avoid tax issues.
Once the account is open, funding can occur through payroll deductions, direct deposits, or electronic transfers. Many employers offer pre-tax payroll contributions, reducing taxable income immediately. For direct contributions, custodians provide online portals or mobile apps for managing deposits. Monitoring contributions is necessary to avoid exceeding the annual limit, as excess contributions incur a 6% excise tax unless corrected before the tax filing deadline.
Tax Ramifications
HSAs provide tax benefits, but account holders must follow IRS rules. Contributions are tax-deductible, even for those who do not itemize deductions. Payroll contributions are deducted pre-tax, also avoiding FICA taxes. Earnings grow tax-free, and withdrawals for qualified medical expenses are not subject to federal income tax.
Non-medical withdrawals before age 65 incur income tax plus a 20% penalty. After 65, non-medical withdrawals are taxed as ordinary income but are not penalized. HSA balances roll over indefinitely, allowing account holders to save for future healthcare costs without a spending deadline.