HSA Rollover Rules

Got an old Health Savings Account (HSA) just gathering dust? Understanding the HSA rollover rules can help you mount this account.

Even if you never lose your old HSA, even if you leave your previous employer, keeping your account intact is not the best idea. Taking advantage of an HSA rollover can put you back in control of your money. Let’s explore the rules and guidelines for rolling over an HSA.

What is an HSA?

What is an HSA?

HAS health savings account (HSA) is a tax-advantaged savings account that you can use to pay for medical expenses not covered by your health insurance.

An HSA is usually established by an employer. You can contribute pre-tax income to the account and withdraw it as needed to pay for doctor visits, dental services and more.

To open an HSA, you’ll need to have a high-deductible health plan (HDHP). The IRS sets strict rules about how much you can contribute to an HSA and what you can use the funds for.

What are the benefits of an HSA?

The tax-exempt status is one of the biggest benefits of an HSA. You can contribute pre-tax dollars to the account and distribute qualified expenses without ever paying income tax.

Plus, account funds can be invested and grown tax-free, and the funds never expire.

Even if you lose your job or HDHP insurance, you can keep your HSA account. At age 65, you can take penalty-free distributions.

👉 More information: Unravel the intricacies of the tax system and understand how to do taxes work for individuals with our straightforward explanation.

What is covered in an HSA?

HSA funds can be used for a wide range of health-related services, including services that insurance may not traditionally cover, such as:

  • Treatment of infertility
  • Acupuncture
  • Hearing aids
  • Teeth
  • Childbirth classes
  • First aid kit
  • Acne treatment

See the IRS for a complete list of covered expenses (and those that are not). 2022 Medical and dental expenses edition.

🏥 More information: Discover how to secure health insurance when self-employed with our step-by-step guide tailored for freelancers and entrepreneurs.

Basic HSA Rollover Rules

An HSA rollover occurs when you move funds from an old HSA to a new one. If you want to transfer your existing HSA funds to another HSA, there are two important HSA rules to keep in mind.

  1. You can only complete an HSA rollover once every 12 months
  2. You have 60 days from your paycheck to deposit funds into your HSA

If you violate Rule 2 above, you will be subject to a 20% early withdrawal penalty and the money will be treated as income.

Let’s say you withdraw $5,000 and your distribution is taxed 22%. Your penalty would be $1,000 (20% x $5,000) and your total tax would be $1,100 (22% x $5,000). That leaves only $2,900 after penalties and taxes.

It is also worth noting what is No required when completing an HSA rollover.

  • You do not have to be currently covered under an HDHP
  • You may not be currently eligible for HSA contributions
  • Rollovers do not count toward annual contribution limits
  • Flipping does not count as income

The IRS determines the above rules and regulations. Individual HSA providers may have their own rules for HSA rollovers.

How Does an HSA Rollover Work?

Completing the HSA rollover is simple, but there are a few steps you will need to take.

🏃‍♂️ Step 1: Choose a new HSA provider

You can transfer an HSA to an existing HSA or open a new one. Be sure to research the HSA provider thoroughly and ask about any rollover restrictions or fees.

🏃‍♂️ Step 2: Start the rollover

You will need to contact your old HSA provider (or plan administrator) to initiate the transition. The provider will then issue you a check for the full value of your account. This process may take several days.

🏃‍♂️ Step 3: Deposit the check

Once the check is crossed, the clock starts running on the 60 day rule. Check with your new HSA provider to see how they accept funds (ie, whether you can sign a check or whether you need to deposit and then transfer funds). If you haven’t completed step 1 yet, you will need to do so as soon as possible.

Keep in mind that HSA funds will not be available to you during the rollover process.

HSA Rollover Rules vs. Transfer Rules

An alternative to an HSA rollover is an HSA rollover. Transferring funds from one HSA to another often has fewer restrictions than a rollover. Here are some key differences.

HSA Rollover HSA transfer
Funds are issued directly to you Funds are transferred between providers
1 rollover allowed per 12 months No frequency limit
It usually requires the old account to be emptied and closed Partial transfers are possible
Free of charge Sometimes it comes with a fee
Possible tax penalties if you exceed 60 days It can take a few days to a few weeks to complete
It can take a few days to a few weeks to complete It is often processed faster than a rollover

On paper, an HSA transfer is more beneficial, especially if you have multiple HSAs that you want to consolidate. However, some providers don’t allow transfers and others charge fees for transfers, which may be a better option.

Should I roll over an HSA?

If you have an old HSA from a previous employer that is unused, it may be helpful to look into completing a rollover. However, there are a few things you should consider before starting this flip.

An important factor is the account balance. If your old HSA balance is low, it may be easier to simply spend the funds.

Another important factor is account fees. If your old account is charging hefty fees, then rolling over makes sense. However, if your new account has higher fees, keeping your old account unchanged may be a better option.

Another point of consideration is account options, specifically investment options. Different providers offer different investments and have different investment thresholds and restrictions. If you’re getting good returns with your old HSA, you may want to keep the funds there.

Finally, you’ll want to evaluate the timing of the rollover. If you have an upcoming need for medical services, you may want to delay the rollover. Or, if you have multiple HSAs you want to consolidate, the once-a-year limit may mean delaying some of your rollovers.

Remember, if you go ahead with a rollover, you must follow all HSA rollover rules to avoid costly penalties.

Frequently asked questions

Am I eligible to contribute to an HSA?

The IRS has strict rules about who can contribute to an HSA and how much can be contributed. There is 2023 Summary. This eligibility for an HSA contribution is often cited in the instructions for rolling over and using the account.
To be eligible to contribute to an HSA, you must have a high-deductible health plan (HDHP) and not be covered by any other health plans.
You can not contribute to an HSA if you qualify as a dependent or are currently receiving Medicare benefits.

How much can I contribute to an HSA?

This depends on your age and whether you have an HDHP individual or family plan.
For 2023, the limits are as follows:
– $3,850 for yourself only
– $7,750 for family coverage
– $4,850 for yourself or $8,750 for family coverage if you are 55 or older
HSA rollovers do No count towards the annual contribution limits.

Do I have to report an HSA rollover on my taxes?

No. HSA rollovers are not distributions and should not be recorded as distributions, income or contributions.
You will have to report everyone else HSA contributions and withdrawals per year.
If you exceed the 60-day deadline to complete the rollover, you will need to report the rollover as income and pay taxes accordingly.

Can I transfer funds from my retirement account to my HSA?

Yes. You can move funds from a Roth IRA to an HSA once in your lifetime, but only if you are currently eligible to contribute to the HSA. Transferred funds do count towards your annual contribution limits.
You cannot transfer funds to 401 thousand on the HSA.

What happens if I lose my HDHP?

If your insurance no longer qualifies for a “high deductible,” then you can no longer contribute to your HSA.
You’ll still have access to your HSA and can initiate rollovers and manage investments as needed. You can also still receive qualified medical distributions even if you don’t have an HDHP.

What happens to unused HSA funds?

Nothing. HSA funds stay in your account indefinitely, even if you leave your employer. Depending on your provider’s account fees and investment options, your balance may continue to increase or decrease without you having to contribute or distribute.
Starting at age 65, you can start taking non-medical distributions.

What is the difference between an FSA and an HSA?

Both HSAs and flexible spending accounts (FSAs) allow you to spend pre-tax dollars on eligible medical expenses. However, the requirements and limitations are different.
You do not need an HDHP to qualify for an FSA. Funds are available for the entire year at the beginning of the year.
FSAs, on the other hand, don’t roll over funds every year. Any money you don’t use by the end of the year is forfeited. FSA funds also cannot be invested, so there is no tax-free growth. FSAs are separate accounts with smaller contribution limits.

Can I ever cash out my HSA?

Yes, you can withdraw your HSA at any time; however, penalties may apply.
The distribution of non-medical expenses is subject to tax and will be subject to a 20% penalty. So if you withdraw $10.00 from the HSA, you will be penalized $2,000 plus income tax.
There is an exception for people over 65. At age 65, you can take penalty-free distributions from your HSA. However, non-medical withdrawals at this age will still count as income.

What happens to my HSA if I die?

If your surviving spouse is the beneficiary, ownership of the account will be transferred to them. The transfer is No taxable and can continue to use the funds for their own medical expenses and begin taking penalty-free non-medical distributions at age 65.
If the beneficiary of the account is not your spouse, the account ceases to be an HSA. The funds become the taxable income of your beneficiaries. There is no 20% early withdrawal penalty.

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