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Morningstar report names only one HSA provider high quality

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Morningstar’s annual report card for the providers on the menu of so-called “triple-tax-free” health savings accounts is in, and most did not earn very high grades.

Only one HSA firm — Fidelity Investments — out of 11 reviewed by the independent investment research firm as part of its yearly “Health Savings Account Landscape” report last month got an assessment of being “high” quality for the purposes of paying for medical costs and acting as a long-term investment account. Just three others — HealthEquity, HSA Bank and Saturna — received “above average” ratings on both measures. 

First American Bank, Lively, UMB, Associated Bank, NueSynergy, Optum and Bank of America came out “average” or “below average” in covering health costs or being a long-term investment account. Importantly, Morningstar used public data and a survey, so the report noted that it was not evaluating specific employer-offered HSAs that vary based on their size and relationships with providers.

Low interest rates for client cash holdings and higher relative fees for custody and the underlying investments drove the poor grades for most of the providers, according to Greg Carlson, a senior manager research analyst for equity strategy with Morningstar and one of the authors of the report. An average expense ratio of 24 basis points on the available investment funds in the plans offered one bright spot from the report, since the decline from 29 bps last year added up to “a significant one-year decline” and “the biggest change we’ve seen,” he said.

“Part of it is Fidelity just beating everyone in terms of fees pretty much, and that’s a big advantage,” Carlson said. “They have come down across the board. Just like in other areas of asset management, competition has intensified on the fee side.”

READ MORE: IRS adjusts HSA amounts for 2025

The often-discussed advantages of HSAs from getting pretax contributions, untaxed investment returns and tax- and penalty-free withdrawals for medical purposes come with some challenges. Only high-deductible health insurance plans are eligible, every provider besides Fidelity and Lively require participants to put a minimum level of assets into the HSA before they can do any investing, and Fidelity is the only one out of the group of 11 to pay interest rates on cash assets above 1%. 

HSAs are often “sub-par regarding interest on cash balances,” said planner Autumn Knutson of Tulsa, Oklahoma-based Styled Wealth.

“HSAs are a powerful vehicle for tax-advantaged healthcare savings, but most consumers are stuck with whatever provider their employer chooses if they want to benefit from payroll deductions toward their HSA,” Knutson said in an email. “As if the nuances of understanding how to qualify for, contribute to and invest within an HSA were not tricky enough, an additional layer of complexity for HSA providers is within the interface, navigating minimum cash balance requirements and fees for other services or selections.”

HSA assets have soared by a factor of 22 between 2006 and 2023 to $123 billion as the share of workers using employer-sponsored plans that have high-deductible health insurance plans jumped from 7% to 31%. HSAs started in 2003 as an effort “to make high-deductible plans more attractive,” according to the report. 

In another finding that’s consistent with other studies but crucial to financial advisors and tax professionals working with clients who have HSAs, an average of 74% of the plan participants among surveyed providers used the accounts to cover medical expenses but didn’t take advantage of the ability to invest through them. 

The participants “may not be able to meet and maintain the minimum investment account balances most providers require” or have enough left over for stocks and bonds after paying medical bills, the report said. The average American had about $13,500 in healthcare expenses in 2022, according to Centers for Medicare and Medicaid Services figures cited by Morningstar.

“Plans have gotten better in important ways,” the report said. “Both investment and spending account fees have continued to decline, for example, and investment option quality keeps improving. HSA transparency and ease of use could still improve, though, and costs — particularly investing and custodial fees — could drop further. The process of investigating, signing up for and funding accounts remains complicated. Fewer top providers charge maintenance fees, but some still do — and they often require minimum account balances before participants can invest. Most providers also pay paltry interest rates on spending account balances below relatively lofty levels, even two years after rates began rising.”

READ MORE: HSAs should be promoted as way to supplement retirement savings

While high-deductible plan participants can use a different HSA provider than the one chosen by their employer, that one is “likely most convenient and financially advantageous” because “your contributions are deducted before Social Security and Medicare taxes,” Knutson noted. More often, the participants will move to an alternate provider once they change employers.

As for the investing side of HSAs — or the lack thereof — “some of the biggest problems I see” in the accounts are savers who are “accruing large balances and not investing the cash amounts at all,” Knutson said.

“This is a function less on the HSA provider and more on investors understanding that funds in an HSA are not invested by default, but rather need to be invested after they are contributed,” she said. “Just as 401(k)’s now have a default investment option to protect investors from having decades of funds accidentally uninvested, an idea for improving HSAs could be to have any excess beyond a planned out-of-pocket max be invested, as this would cover any expenses incurred through health insurance and allow any excess amounts saved into an HSA to be invested for longer term goals.”

Companies and lawmakers “can do more to motivate HSA participants to take advantage of their plans’ investment features,” according to the Morningstar report. 

“While employers can automatically enroll employees in employer-sponsored retirement plans, the government has not yet allowed them to do the same for employees who are eligible for HSAs. Automatic enrollment has boosted retirement plan participation,” the report said. “Another barrier to increased HSA investing is that participants sometimes aren’t aware of investment-account options. Providers could simplify the account-opening process and better teach participants both how to transfer between the two account types and about the benefits of long-term investing. Providers that offer better guidance and tools tend to have higher average investment account balances.”

In addition, Morningstar gave advisors, tax pros and their clients some best practices to seek out from their providers when using HSAs. For medical expenses, they should look for “no ongoing maintenance fees,” “competitive interest rates on account balances,” “few or no additional fees” and “FDIC insurance on the spending account.” 

When thinking about the long-term investment side of HSAs, they should find providers who have “investment menus that cover core areas and limit overlap and volatile or niche strategies,” “investment options that earn Morningstar Medalist Ratings of bronze or higher,” “low fees” and “no minimum balance in a spending account required before investing.”

READ MORE: The HSA ‘deathbed drawdown’: Making tax-efficient distributions when there isn’t much time

Advisors can guide clients through their HSA decisions with an eye toward the lowest-cost investments and an understanding that even a core bond fund could bring higher return than cash, according to Carlson. One method to lock in some intermediate and longer-term gains would be to set aside the “money you’ll need in the short term,” he said. 

“Obviously, health care costs are high and rising, so you do want to make sure that, first and foremost, you’re not taking a lot of risk with money you may need to use immediately or in the short term,” Carlson said. “You want to probably try to separate pools of money.”

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Accounting

Trump win may threaten IRS funding

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The Internal Revenue Service may be facing steep cuts in its budget with the win on Tuesday night of President-elect Donald Trump.

Funding for the IRS has become a political issue, with Republicans successfully pushing to cut the extra $80 billion funding from the Inflation Reduction Act of 2022 already during battles over the debt limit.

“I think IRS funding is at significant risk right now, both the annual appropriation funding as well as the remaining IRA funding,” said Washington National Tax Office principal Rochelle Hodes at the Top 25 Firm Crowe LLP. 

Donald Trump during an election night event in West Palm Beach, Florida
Donald Trump during an election night event in West Palm Beach, Florida

Win McNamee/Getty Images

So far, Republicans have mainly called for cuts in the IRS’s enforcement budget. The increase in enforcement is supposed to be used to pay for the cost of the IRA, but the funding increase is also supposed to be used for taxpayer service and technology improvements.

“The only question for me on funding is, will any portion of the funding remain available for taxpayer service-related improvements at the IRS?” said Hodes.

The Direct File free tax prep program that the IRA funded could also be targeted, even as the IRS makes plans to expand it beyond the original 12 pilot states this year to 24 next tax season.

“I don’t think that will be in the sight line, but the IRA money is part of what’s being used for that,” said Hodes. “As we’ve seen in appropriations bills, there could be language directed at that, that no money can be spent on that initiative.”

A more important priority will be the extension of the expiring provisions of the Tax Cuts and Jobs Act of 2017. “Getting TCJA resolved is going to be the first priority,” said Hodes. “The second question is, how will the cost of that endeavor be determined. If the view that is held by several Senate Republicans wins the day, then the cost of extending the expiring provisions will not be counted under those particular budget rules that are created dealing with extending current policy. If, however, that view is not adopted, then there is a high cost just to TCJA, and so any other provisions with cost will sort of stretch the boundaries of what many in Congress would be comfortable with. I think it will be necessary to see how the scoring goes for extending TCJA provisions.”

Trump has also called for exempting various forms of income, such as tip income, Social Security income and overtime from taxes.

“I also am not sure which of the ideas that were put forward on the campaign trail, other than extending TCJA, are provisions that have true champions who will want to pursue those,” said Hodes. 

That may depend on who ends up in Congress, with several important races in the House yet to be decided.

“Although the House remains undecided, the Republicans’ control of the Senate makes it much more likely that Republicans will be able to implement many of Trump’s proposed tax policies, such as making parts of the expiring 2017 TCJA provisions permanent,” said John Gimigliano, principal in charge of the Federal Legislative & Regulatory Services group within KPMG’s Washington National Tax practice, in a statement. “The pressing question now is how the Administration and Congress will fund such an ambitious agenda and what additional measures they might introduce, such as eliminating taxes on tips and overtime. These items will only add to the hefty $4+ trillion price tag they face. Until then, taxpayers should continue to stay apprised of developments and scenario plan for the different outcomes to get ahead.” 

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Firms plan to raise fees next year

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Over half of accounting and tax firms plan to increase fees across all services in 2025, according to a new survey.

The survey, released Wednesday by practice management technology company Ignition, found that the majority (around 58%) cited rising business costs as the main motivator for their fee increases, while only 5% are raising prices to increase revenue. Most of the nearly 350 firms surveyed intend to increase fees across services by 5% or 10%.

Some 57% of the respondents plan to increase fees across all services. With regard to tax preparation specifically, 90% of the survey respondents plan to increase fees for individual tax returns, and 87% plan to increase fees for business tax returns. In addition, 70% plan to increase fees for tax planning and advisory services;. 85% plan to increase fees for bookkeeping and accounting services; and 76% plan to increase fees for CFO and controller services.

“While accounting firm owners are embracing price increases in 2025, the report shows that the majority (around 58%) cite rising business costs as the main motivator,” said Ignition global president Greg Strickland in a statement. “Only 5% are raising prices to increase revenue, which indicates an opportunity for firms to leverage pricing as a strategic tool to unlock revenue growth.”

The report found a shift from hourly billing to fixed-fee and value-based pricing, with 79% of the survey respondents indicating they use fixed-fee or value-based pricing for bookkeeping and accounting services. Over half (54%) use fixed-fee or value-based pricing for tax preparation services, 67% use fixed-fee or value-based pricing for tax planning and advisory services, and 75% use fixed-fee or value-based pricing for CFO and controller services.

The report benchmarked current fees for tax, accounting and advisory services, which varied based on firms’ annual revenue range. The biggest variation in pricing was for tax planning and advisory services in particular. For firms with revenue of as much as $250,000, approximately 23% said they charge less than $500 for these services, while a nearly equal number (around 21%) indicated they charge more than $2000.

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Accounting

Millionaire tax backed by Illinois voters in threat to Chicago

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Illinois voters approved a nonbinding proposal to add an extra 3% levy on annual incomes of more than $1 million, which could fuel a new effort to raise taxes on the state’s highest earners.

The ballot measure – which was an advisory question – won 60% of support, according to the Associated Press. About 90% of the votes have been counted.

“The vote is a gigantic step in the right direction,” said former Governor Pat Quinn, a supporter of the measure. 

quinn-pat-bl020212-357.jpg
Pat Quinn

Daniel Acker/Bloomberg

While the proposal has no legal effect, the vote opens the door to a new debate over ramping up taxes on the rich even as Illinois and Chicago, its biggest city, contend with population declines and a string of departures by major companies and wealthy residents. In 2020, voters rejected a separate measure backed by Governor JB Pritzker to replace the state’s flat tax on incomes with a graduated system that would raise rates on higher-earners.  

The Pritzker plan drew staunch opposition from billionaire financier Ken Griffin, who donated about $50 million to help torpedo the initiative. Griffin then left Chicago for Miami in 2022, moving the headquarters of his Citadel empire there as well. Companies from Caterpillar Inc. to Boeing Co. have also departed amid rising concerns over public safety, regulation and taxes. 

This year’s referendum asked voters if the Illinois Constitution should be amended to create the additional tax on income over $1 million. It called for using the proceeds to ease the state’s notoriously high property levies. 

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