Minimizing fees with Saturna HSA

This year I became eligible to contribute to a Health Savings Account (HSA). After reviewing many web resources, including

I shortlisted three HSA provider options:

  1. The HSA Authority
  2. Lively HSA : LINK to Boglehead discussion.
  3. Saturna HSA : LINK to Boglehead discussion.

Selection Criteria

My primary purpose of having the HSA is for investing. My HSA provider selection criteria include

  • No wrap fees. Any HSA with wrap fee is a non-starter for me. HSAs that have wrap fees are eliminated and not considered.
  • First dollar investing. Several HSAs require you to keep a certain amount of money in a (usually) low paying savings account before you can invest your money or to waive their fees. The amount of money could range from $1,000 to $5,000. To me, this is a “cash drag penalty” on investments. If we assume a yearly portfolio return of 5% to 6%, the “implicit fee” in having each $1,000 kept in cash could be like $50/year. If we do not put a value to the implicit fee, we would not realize how huge this fee could be. For example, HSA Bank offers to waive the total $5.50/month fee if $5,000 is kept in cash. Seriously? The implicit fee for this is like $250/year.
  • Access to low cost funds. I give preference to HSAs with funds that have low expense ratios.
  • Low fees. The lower the monthly or yearly maintenance or account fees, the better.

The HSA Authority

  • First dollar investing.
  • $36/year fee to invest in mutual funds. Investment options include Vanguard S&P500, TSM (both with ER 0.04%), Emerging Mkts (ER 0.14%), EAFE (ER 0.17%), short term bond index (ER 0.07%). Other options include SmallCap, MidCap, TIPS, REIT and Lifestrategy funds from Vanguard.

Lively HSA

  • First dollar investing.
  • $2.50/month for access to TD Ameritrade’s brokerage, with >100 commission-free ETFs (including Vanguard ETFs). Fee apparently is paid from outside the HSA (good).
  • CON: brand new startup.

Saturna HSA

  • First dollar investing.
  • Mutual funds and ETFs are available through their brokerage. Transaction fees: $0 for NTF mutual fund trade, $14.95 for each ETF/stock trade, $24.95 for Vanguard or Fidelity mutual fund trade. LINK to the list of NTF funds at Saturna.
  • Requires a minimum of one transaction per calendar year. Otherwise there is a yearly $25 inactivity fee, which is reduced to $12.50 if the account only holds mutual funds.
  • CON: Lengthy application forms which must be sent in through snail mail.

After reviewing and reminding myself that I would probably be making only one transaction a year, I decided to go with Saturna. However, if I would be making more than one transaction a year, Lively and The HSA Authority are probably better choices.

Fee minimization strategy

Using Saturna, and limiting to one ETF trade a year, the HSA running cost is $14.95/year. However, I realized that by bunching ETF purchases to once every two years, I can save on commission fees even more. The following is one such strategy:

  • Year One: Invest the entire Year One HSA contribution into T.Rowe Price’s S&P 500 index fund PREIX (ER 0.21%). This is a NTF fund (no trade fee, $2,500 minimum, 6-month holding period).
  • Year Two (January): Sell all PREIX, add the proceeds to Year Two contribution and purchase the Schwab International Equity ETF SCHF (ER 0.06%) for a $14.95 trade fee.
  • Year Three (January): Put the entire Year Three contribution and any SCHF dividends into PREIX. Make no change to SCHF.
  • Year Four (January): Sell all PREIX, add the proceeds and any SCHF dividends to Year Four contribution and purchase more SCHF for a $14.95 trade fee.
  • And so on.


  • Because the NTF fund PREIX has a higher expense ratio compared to the equivalent products from Vanguard or Schwab, there is an implicit fee in using PREIX. Assuming Vanguard’s US LargeCap ETF has an ER of 0.05%, this implicit fee is an ER difference of 0.21% – 0.05% = 0.16%. This fee is applicable one out of every two years (years 1, 3, 5 etc.) and is roughly limited to the yearly contribution amount of around $6,800. So on average, this fee is about 0.5 x 6,800 x 0.0016 = $5.44 / year (this fee could be a little higher, depending on the growth of the fund).
  • The ETF trade fee of $14.95 happens once every other year. On average, this fee is $7.48 / year.
  • Schwab’s SCHF was chosen because it only distributes its dividends once a year in December. In January, this dividend gets invested. On the other hand, if I were to use Vanguard’s VEA or VOO, I would have to deal with Q1, Q2 and Q3 dividend distributions.There is a fee to reinvest dividends from ETFs.
  • There is no fee to automatically reinvest dividends for PREIX.
  • It might appear that I am changing my asset allocation between US LargeCap and EAFE equity every year. In reality, I can make compensating trades in my other tax-advantaged IRAs to account for these changes.
  • There is a transaction every year, meeting the account activity requirement.


The total fee using the above Saturna HSA strategy is approximately $5.44 + $7.48 = $12.92/year. This is lower than either Lively’s $30/year or The HSA Authority’s $36/year.

Substitute Dividend Payments in Margin Accounts

I have a margin account with  eOption for a couple of years now. When I first signed up, they have among the lowest margin interest rates in the industry, They have since adjusted the rates upwards, following the footsteps of Tradeking, Just2Trade, etc.

I spoke to customer service when the rates were first revised and they agreed to grandfather me to the more-friendly rate schedule. This more-friendly rate schedule is still available at their sister brokerage  The current rate is as follows:

The current Broker’s Call Rate is 2.00% as of 12/19/2008

Daily Average $ Debit Balance

Interest Rate

Less than 49,999 1.50% above broker call rate
50,000 to 99,999 .75% above broker call rate
100,000 to 249,999 at broker call rate
250,000 to 499,999 .50% below broker call rate
500,000 and above 1.00% below broker call rate

Anyway, I started taking advantage of their low margin rates but in the first quarter, I was hit with a substitute dividend payment in an ETF I was holding in that account. This is the definition of a substitute payment from Fidelity:

Substitute Payments
Substitute payments are payments received in lieu of dividends, interest, or other payments. They may be generated, for example, where a security has been lent to a third party (such as a broker) over a dividend record date. When an investor has a debit balance in a margin account, securities in the account are often eligible to be lent. If the shares are lent over a record date, the investor should receive a substitute payment equal to the amount of the dividend. Although the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) introduced lower federal tax rates for qualified dividend income, substitute payments are not taxed as qualified dividends but are instead taxed as ordinary income. Substitute payments in lieu of dividends and tax exempt interest are reportable in Box 8 of Form 1099-MISC.

So basically, with a substitute dividend payment, you get taxed at the full income tax rate instead of the preferential (15% for most tax payers) qualified dividend tax rate (if the dividend was originally qualified).

The negative consequence of this could be huge. For an ETF like VEA, I could get a year-end dividend in the range of a few thousand dollars. If it gets disqualified, my additional taxes could run into several hundred dollars.

There are a few ways to avoid this

  1. Move the assets to a brokerage that “gross-up” the dividends to compensate for the additional taxes you have to pay. I only know of two brokerages that have this voluntary program — Fidelity and TD Ameritrade. As far as I know, VBS (Vanguard) and WellsTrade do not offer this. eOption also does not offer this. Edit: Schwab also offers this voluntary “gross-up” program.
  2. Move the assets to the cash position. Some brokerages let you specify the “account type ” of each asset, whether it is “cash” or “margin”. eOption offers this and I moved the assets that potentially produce qualified dividends to “cash”. I left the non-dividend producing assets in “margin”. I don’t believe VBS lets you do this though; all the assets in each account must be the same “type” in VBS.
  3. Do not keep a debit balance. If we read Fidelity’s definition carefully, it says that if “an investor has a debit balance in a margin account, securities in the account are often eligible to be lent”. So technically if there is no margin balance, no shares should be loaned out. Personally, I do not regard this method as a fail-safe method. When you sign on the dotted line for a margin account, you are already giving permission to the broker to lend out your shares. It could be possible that the broker will refrain, as far as possible, from lending out your shares in this scenario, but I think there is no guarantee that this would never happen.

Note: FWIW, my experience is that method 3 seems to be true. Until the eOption experience, I have never received a substitute payment with the many margin accounts I have had over the years. The reason could be simply because I have never kept a margin balance except at eOption.



Less than 49,999 1.50% above broker call rate
50,000 to 99,999 .75% above broker call rate
100,000 to 249,999 at broker call rate
250,000 to 499,999 .50% below broker call rate
500,000 and above 1.00% below broker call rate

Muni ETFs with in-cash creations

Indexuniverse has an interesting article on in-cash ETF share creations for muni ETFs as opposed to in-kind creations. The article attempts to explain how in-kind creations can help to eliminate ETFs trading premiums in cases where the underlying securities are relatively illiquid.

The following figure shows the trading premiums of the two types of ETFs.



Clearly allowing cash creations helped to reduce the trading premiums.

It sure looks like there is yet another factor to consider when purchasing ETFs, especially if the underlying assets are illiquid.