As health insurance premiums continue to climb, many companies are turning to High Deductible Health Plans, combined with HSAs to curb costs, incentivize good health, and help employees save on their tax bill.
If you’ve enrolled in an HSA compatible plan through your employer, there will come a time when your relationship with that employer ends. With this in mind, here are some of the more common questions we receive about HSAs:
(By the way… If you’re unsure if an HSA is right for you, here’s a great article from Betterment on the advantages of opening and funding a Health Savings Account.)
Q: What happens if I leave my job and want to continue using my HSA?
When you leave your job, you have 3 options:
- Continue coverage through COBRA
- Enroll in new coverage through your state’s individual marketplace.
- Let your coverage lapse. (Not advisable!!)
Here are the repercussions of each decision:
- So long as you continue with an HSA-compatible plan, ie. a “High Deductible Health Plan”, you’re in the clear. Assuming you were on this type of plan, to begin with, this is a valid option for up to 36 months.)
- Enrolling in new coverage, provided it is an HSA compatible plan, with no lapse, will result in zero repercussions to your HSA eligibility. Typically, plans that are HSA compatible are clearly marked as such. This is a great route and may save you money compared to continuing with your employer-provided option through COBRA. Additionally, you may qualify for subsidies to your coverage by enrolling in a plan through your state exchange. (Click here for more info on locating and understanding your options through healthcare.org.)
- Allowing your coverage to lapse is definitely the worst option on this list. In addition to exposing yourself to the financial risk of a medical emergency, you also fail to meet the main requirement of having an HSA in place. For more on this, see the IRS guidelines on qualifying for HSAs.
Q: What do we do with our HSA account if we decide to purchase non-HSA compatible coverage?
If you discontinue coverage under an HDHP, you’re no longer eligible to make contributions to your HSA going forward.
However: since the money in your account was funded prior to you leaving your HDHP, you can still use the money without being penalized. Namely, you can continue to use the remaining funds for future qualified medical expenses, or simply save the money and withdraw after the age of 65.
Q: What happens if you only have an HSA plan for part of the year?
This answer references the same IRS publication linked above.
In this spellbinding document (haha), starting at the end of page 4, it outlines limits on contributions but doesn’t address the question we want to know – what happens if you move to a non HSA compatible, or “non HDHP”, as IRS likes to call it.
What we read is this: if you move off your existing HSA, you’ll be in the clear. But let’s define clear: For each month you don’t have HSA-compatible coverage, your contributions will need to be pro-rated.
Ted enrolls in an HSA-compatible plan through his employer on 01/01… He then fully funds his HSA account for the year. For 2017, this would be $3,400. After 6 months of employment, he is terminated. (more on HSA limits for 2017 here)
Ted elects NOT to take COBRA or enroll in another HSA-compatible plan.
Assuming this continues for the remainder of the year, Ted will only be able to take advantage of 1/2 of the annual maximum benefit, or $1,700.
Breaking it down:
6 out of 12 months = 1/2 of the year…
Yearly max becomes$3,400 x 1/2, or $1,700.
Ted ends up losing out on this $1,700 tax deduction. If his tax rate is 25%… This means he’s forfeiting a tax savings of $425… Might be worth it for Ted to maintain HDHP coverage!
Q: Now that I’m leaving my plan, can I move my HSA money to another bank?
Absolutely! It’s your money. 🙂
Moving your HSA is as simple as contacting your preferred bank or credit union, opening an HSA account, then asking the bank that currently host your HSA funds to do a “rollover”… Being that HSA’s are tax-advantaged accounts, you want to use the same care as rolling over other tax-advantaged products like IRA’s, Roths, etc…
HSAbank, for example, has a guide on rollovers here.
Overall, most HSA aficionados agree: Keep your account with your preferred bank, credit union, or investment bank. This way it’s easier to monitor, transfer money into, etc…
A simplified explanation of the benefits of an HSA:
- tax deductions from gross income when you contribute to your HSA
- tax-deferred earnings through interest
- use it for a wide variety of qualified medical expenses
- ability to invest your HSA balance
- NEVER taxed on withdrawals for qualified medical expenses
- non-medical withdrawals, with no penalty, at age 65+ (20% tax penalty on non-qualifying withdrawals prior to that)