Q: We have a Health Savings Account at a local community bank. It’s basically for large medical expenses, so we don’t use it often. We just received a notice in the mail that the account “has been inactive since March 2, 2016, and will become dormant on March 2, 2018. Although this is your money, the law requires us, after a certain period of time, to turn over the money on deposit in inactive accounts to the State. ... Dormant balances of $999 or less will be charged $6 monthly.” I thought an account had to be dormant much longer than two years. Doesn’t the state have better things to do than to go after accounts that have been inactive for two years or longer? Also, the $6-per-month fee seems excessive and the state should be more concerned about those high dormancy fees than two years of inactivity. Could you check this out please? It just doesn’t sound correct.
S.B., of Belleville
A: While Health Savings Accounts can help keep your body feeling hale and hearty, their fine print may make you feel financially ill if you’re not careful.
As unfair as it may sound, the bank is in its legal rights to charge dormancy fees on HSAs that have seen no transactions for a set period of time as long as they were spelled out in the contract you signed. In fact, believe it or not, your bank has been more patient than some. According to national consumer watchdog groups, some banks begin charging such fees after just six months or a year.
Moreover, this is one time you probably shouldn’t criticize the state. The bank may render your account dormant after two years, but according to the Illinois Department of Financial and Professional Regulation, your money won’t be turned over to the state for another three. Even then, the money, which the state would consider “abandoned,” can still be claimed by its rightful owner at any time through the Illinois treasurer’s office. The upcoming fees, however, are a matter between you and your bank.
Here’s the deal:
For those not familiar, Health Savings Accounts were created in 2003 to allow those in certain high-deductible health insurance plans to save money for medical bills. The advantages can be enormous. This year, for example, individuals can take up to a $3,450 tax deduction ($6,900 for families) by socking away those amounts in an HSA. Those over 55 can add another $1,000 as a “catch-up” contribution.
But that’s just the start. In addition to the initial tax deduction, all investment returns the account earns (interest, dividends, etc.) are also tax-free. Third, unlike a regular Individual Retirement Account, withdrawals are also tax-free when used for qualified medical expenses. Finally, unlike Flexible Spending Accounts, you don’t face a use-it-or-lose-it ultimatum of having to drain your account each year. An HSA can be maintained indefinitely.
But as you are finding out, this last selling point can wind up costing you money. Banks and brokerages do not like accounts that just sit there. They want money coming in and out to justify the expense of keeping tabs on them. Eventually, they don’t know whether their owners are even alive, so they turn them over to the state. I personally had an experience with this that involved an aunt who died and left an account open of which our family was unaware.
In the case of HSAs, banks and credit unions often treat them as checking accounts. This means they fall under something called “escheatment laws,” which means the state can take control of any accounts considered abandoned. And you shouldn’t feel singled out. Just last year, Reuters reported that at least 24 percent of the 20-million-plus Americans who opened HSAs leave them inactive.
As you might imagine, this has turned into a bit of a gold mine for banks. According to the Consumer Federation of America, these accounts, depending on the bank, can be declared dormant as soon as they go six months or a year without a transaction. Banks then start charging fees of $1 to $12 per month.
“My sense is that inactivity fees are increasing,” Stan Orszula, of the law firm Quarles & Brady, told lendingtree.com. “Banks have regulatory transactional costs. Complying with these laws and regulations cost time and money.”
Let the accounts go too long, and you’ll get that warning letter saying your dormant account as defined by the bank will become an inactive account as defined by the state. As I mentioned previously, the treasurer’s office says it takes five years before such accounts are turned over to the state in Illinois.
So what can you do? I have no idea whether these will help you, but here are tips from experts: Reread the contract to make sure any fees charged are legitimate. Skip the telephone and ask to talk to a bank manager in person to see if the fee could be waived or, at the very least, what you can do to make sure your account remains active. If that fails, shop around for another bank or credit union, making sure you read all the whereases and heretofores this time. If you’re a loyal customer, perhaps even such a threat could change their mind.
Otherwise, banks apparently will continue to pile up the fees. According to Devenir Research, an estimated $53.2 billion will be in HSA accounts by the end of this year, up 20 percent from 2017.
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