Bypassing Employer HSA and Opening My Own - Any Tax Downsides?

You can absolutely open and fund your own HSA, but you should be aware of one significant tax advantage you'll lose. When HSA contributions are made through employer payroll deductions, they're exempt from FICA taxes (Social Security and Medicare taxes), which saves you about 7.65%. If you fund your own HSA directly, you'll still get the federal and state income tax deductions when you file, but you won't get that FICA tax break. That said, if the investment options and fees at Fidelity are substantially better, the long-term investment growth might outweigh the FICA tax hit, especially if you're investing the full annual contribution and have many years until retirement.

Just want to share my experience with this exact situation! I was stuck with a terrible employer HSA through Wells Fargo with like 3 investment options and ridiculous fees. I switched to funding my own HSA through https://taxr.ai helped me verify I was doing everything correctly with my tax docs. They analyzed my HSA contributions and confirmed I was still getting the income tax deduction while optimizing my investment choices.

Just wanted to update after trying taxr.ai for my HSA situation. I was totally on the fence about it but decided to give it a shot after reading about it here. The document analysis was really thorough! It confirmed I was losing about $230 in FICA tax savings by funding my own HSA, but showed that with Fidelity's investment options and my 20+ year timeline, I'd likely come out ahead by over $8k in the long run even accounting for the lost FICA benefit. The analysis made the decision super clear for me. Just submitted my HSA paperwork to Fidelity yesterday!

If you're still having trouble deciding whether the switch is worth it, you might want to try calling the IRS directly to get official clarification. I was in a similar situation last year and spent DAYS trying to get through to someone at the IRS. Finally discovered https://claimyr.com which got me connected to an actual human at the IRS in about 20 minutes. Their video showing how it works: https://youtu.be/_kiP6q8DX5c really made me feel better about trying the service. The IRS agent confirmed exactly what was mentioned above - you do lose the FICA tax advantage with self-funded HSAs, but there's no other tax disadvantages.

I take back what I said about Claimyr. After continuing to get nowhere with the IRS for over a week, I gave in and tried it. Within 45 minutes I was talking to an actual IRS rep who walked me through all the HSA self-funding options. The agent confirmed there's no issue with funding your own HSA vs employer's plan, except for the FICA tax thing everyone mentioned. I'm going with Fidelity like you were considering - their investment options are way better than my employer's HSA. The FICA hit is worth it for me because I'm planning to let that money grow for 30+ years.

If your employer allows it, the absolute best approach is to contribute to the HSA through payroll deduction (to get the FICA tax savings) and then immediately transfer the money to Fidelity. I do this quarterly - contribute through my employer's trash HSA with Chase for 3 months, then transfer the balance to Fidelity where I actually invest it. You get the best of both worlds - all the tax advantages plus the better investment options!

Random question - does anyone know if HSA contributions count toward the annual 401k limit? I'm trying to max out both but wasn't sure if they share the same annual cap.

One thing to keep in mind is that if you're planning to use your HSA for current medical expenses rather than letting it grow for retirement, the FICA tax savings become more important since you won't benefit from decades of investment growth. But if you're treating your HSA as a retirement account (which is the optimal strategy), then Giovanni's approach of contributing through payroll and transferring quarterly is genius - you get the FICA savings AND the better investment options. Also worth noting that some employers reimburse HSA fees, so definitely check if yours covers any of those transfer fees before making your decision!

This is such a helpful discussion! I'm in a similar boat with a terrible employer HSA through a big bank with limited investment options and high fees. After reading through all these responses, I'm leaning toward Giovanni's hybrid approach - contributing through payroll to get the FICA tax savings, then doing quarterly transfers to a better HSA provider like Fidelity. One question I have though - for those who've done the quarterly transfer approach, do you run into any issues with timing? Like if I contribute through payroll in January but don't transfer until March, am I missing out on 2-3 months of better investment growth? Or is the FICA savings still worth that short-term investment lag? Also, has anyone compared Fidelity's HSA to other providers like Schwab or Vanguard? I want to make sure I'm picking the best option before I start this transfer dance!

This has been incredibly helpful! I'm definitely going with the hybrid approach that Giovanni suggested - contributing through my employer's HSA to capture the FICA tax savings, then doing quarterly transfers to Fidelity for better investment options. After doing the math, I'd be giving up about $317 in FICA tax savings if I went straight to self-funding, but the quarterly transfer method lets me keep those savings while still getting access to Fidelity's superior investment lineup. Even with potential transfer fees, this seems like the optimal strategy. Thanks everyone for sharing your experiences and breaking down all the tax implications. I feel much more confident about making this switch now rather than just abandoning my employer's HSA completely. Time to open that Fidelity HSA account and start maximizing both my tax benefits AND my investment growth potential!

This thread has been incredibly educational! I'm in a very similar situation with my employer's HSA through US Bank - terrible investment options and high fees. After reading through everyone's experiences, I'm convinced that Giovanni's hybrid approach is the way to go. I just called my HR department to confirm the details of our HSA program, and they confirmed we can do unlimited outgoing transfers with just a $20 fee per transfer. So quarterly transfers to Fidelity would cost me $80/year, but I'd still save the full FICA tax benefit (about $317 for me at the max contribution) plus get access to much better investment options. One thing I wanted to add for anyone else considering this - make sure to factor in your state tax situation too. Some states don't allow HSA deductions, so if you're in one of those states, the FICA savings become even more important since that's one of the few tax breaks you'll actually get on your HSA contributions. Thanks to everyone who shared their real-world experiences with this strategy. It's so much better than the theoretical advice you usually see online!

This has been such a valuable discussion! I'm in almost the exact same situation with my employer's HSA through PNC Bank - limited investment options and high fees. After reading through all the experiences shared here, I'm definitely going with the hybrid approach that several people have recommended. I just ran the numbers for my situation: I'd lose about $317 in FICA tax savings if I went straight to self-funding my own HSA, but with quarterly transfers from my employer's plan to Fidelity, I can capture those FICA savings while still getting access to better investment options. My employer's HSA charges $25 per outgoing transfer, so that's $100/year, but I'm still coming out $217 ahead on taxes alone, not even counting the long-term investment growth benefits. One thing I discovered when calling my HSA provider is that they actually waive the transfer fee if you maintain a minimum balance of $1,000 in the account. So I'm planning to keep about $1,200 in the employer HSA and transfer everything above that quarterly. This way I get the FICA savings, avoid transfer fees, and maximize my investment growth at Fidelity. For anyone else considering this strategy, definitely call your current HSA provider to ask about their specific transfer policies and fee structures - you might find some beneficial details that aren't obvious from their standard documentation!