To be eligible to contribute to a health savings account (HSA), you must be enrolled in a qualified High Deductible Health Plan (HDHP). However, as we know, life happens, and situations (and your health insurance) can change. You may get a new job that doesn’t have an HDHP as an option, or just decide that a different type of health insurance is more aligned with your needs.
So, what happens to the money in your HSA?
The funds in your HSA won’t disappear even if you ever become ineligible to contribute to an HSA. It won’t impact your credit score, trigger any tax rules, or incur any sort of penalties to you.
If you leave your HDHP while you have an HSA, you can still spend the money, or use the funds to reimburse yourself for qualified medical expenses. However, once the money is gone, you’ll no longer be able to make contributions to the account. In addition, you can still invest the money in your HSA even when you’re no longer eligible to contribute to your account.
The money in your account still gets the same benefits as before. You still get tax-free distributions to spend on qualified medical expenses. If you want to, you can let the money roll over year to year just like when you’re enrolled in an HDHP.
You Have Options When You’re No Longer HSA-Eligible
When you’re no longer eligible to contribute to your HSA, you can keep the funds in your account to gain interest. In the event that you become eligible to contribute again in the future, you can keep contributing to the same account with no penalty.
You could also use the money in the account, close it out and open a new HSA if you find yourself with an HDHP in the future. As long as you use the money for qualified medical expenses, the withdrawals are tax-free.
If you are no longer eligible for an HSA, that doesn’t mean that you can’t use the funds in your account. You can still use the money in your HSA for qualified medical expenses without being taxed.
A third option would be to cash out your HSA. The downside is that if you’re under 65 and you close your HSA to withdraw the money, you will owe income taxes in addition to a 20 percent penalty on the funds if they’re used on non-qualified medical expenses. If you’re over 65 and choose to withdraw the funds, you will just owe regular income taxes. However, all distributions on qualified medical expenses will always be tax-free.
You Can Move Your HSA
If your HSA was provided as an employer benefit, you have the option to move your HSA balance to another HSA provider. You don’t have to close your HSA; you can initiate a transfer - or rollover - to a different HSA provider. The good news here is that you can move your HSA to a different provider without any penalty.
Rollovers and transfers are two different ways to move your HSA from one provider to another. With a rollover, the original HSA provider physically sends you a check or electronically transfers the funds to you. You then have to send the money to a new HSA provider within 60 days of receipt. You’re able to roll over your funds at least once in a 12-month period.
With a transfer, you simply open a new HSA and request the original HSA to send the money directly to the new HSA. You don’t have to worry about physically getting the funds to the new HSA, the HSA administrators will handle it for you. There are no limits on how often you can transfer money from one HSA to another.
If you’re considering moving your HSA to a different provider, visit with an accountant, tax advisor, or financial representation to find what’s best for your specific situation. For many of us, keeping your HSA even though you’re no longer HSA-eligible is likely a better option than cashing it out. No matter which way you go, remember you can’t make contributions once you no longer have a qualifying HDHP. The silver lining is that you own your HSA and have options on handling the funds when you are no longer HSA-eligible.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.