Can I Use My HSA if I Switch to a PPO?

A Health Savings Account (HSA) offers a way to save for healthcare expenses with tax advantages. These accounts work with specific types of health insurance plans. Understanding how a change in your health coverage, particularly to a Preferred Provider Organization (PPO) plan, affects an existing HSA is important for managing your healthcare finances.

HSA Contribution Eligibility and PPO Plans

The ability to contribute new funds to a Health Savings Account is tied to enrollment in a High-Deductible Health Plan (HDHP). An HDHP is defined by Internal Revenue Service (IRS) thresholds for deductibles and out-of-pocket maximums. For 2025, an individual HDHP must have a minimum deductible of $1,650 and an out-of-pocket maximum of no more than $8,300. For family HDHP coverage, the minimum deductible is $3,300, with an out-of-pocket maximum not exceeding $16,600. These figures are set annually by the IRS and are important for determining if a health plan qualifies as an HDHP.

Most PPO plans do not meet these high-deductible criteria. While PPO plans offer flexibility in choosing healthcare providers, they often have lower deductibles or different cost-sharing structures that fall outside the HDHP definition. If you switch from an HDHP to a PPO plan that does not meet the IRS’s HDHP requirements, you will no longer be eligible to make new contributions to your HSA. HSA contributions are only permitted when you are covered by an HSA-eligible HDHP. Losing HDHP coverage means you cannot add more money to your HSA.

Using Existing HSA Funds

If you transition to a PPO plan and are no longer eligible to contribute to your HSA, the funds already accumulated in your account remain yours. These existing HSA funds can still be used tax-free for qualified medical expenses. This portability is a key advantage of HSAs, allowing you to use your savings regardless of your current health insurance coverage.

Qualified medical expenses are defined by the IRS and include a wide range of services and products. These encompass medical, dental, and vision care, such as doctor’s office visits, prescription medications, and common treatments like dental cleanings or eyeglasses. Other eligible expenses include ambulance services, physical therapy, and over-the-counter medications.

The IRS considers an expense qualified if it falls under the definition of medical care, as outlined in IRC Section 213. While health insurance premiums are not qualified expenses, exceptions exist for long-term care insurance premiums, COBRA health care continuation coverage, or health coverage while receiving unemployment benefits. Funds can also be used for Medicare premiums once you are age 65 or older.

Tax Considerations for HSA Distributions

Distributions from an HSA used for qualified medical expenses are tax-free. This means you can continue to withdraw funds for eligible healthcare costs without owing federal income tax on those withdrawals. This tax-free benefit applies to expenses incurred by you, your spouse, or your tax dependents.

If HSA funds are withdrawn for non-qualified expenses, these distributions are subject to taxation. The amount withdrawn will be included in your gross income and taxed at your ordinary income tax rate. If you are under the age of 65, a 20% penalty tax is applied to non-qualified distributions.

This 20% penalty is waived if the account holder is age 65 or older, or if they become disabled. After age 65, non-qualified distributions are only subject to ordinary income tax, treating the HSA somewhat like a traditional IRA in retirement. Maintain records, such as receipts for all medical expenses, to substantiate that distributions were for qualified purposes if the IRS requests verification.

Managing Your HSA Account After a Plan Change

You retain full ownership and control over existing HSA funds. You can keep the account with your current HSA administrator, allowing the funds to continue growing tax-free through investments. You may also transfer your HSA funds to a different HSA provider. Some providers may offer lower administrative fees or a wider range of investment options.

Many individuals leave their HSA funds invested for future healthcare needs. The funds in an HSA roll over from year to year indefinitely, without a “use-it-or-lose-it” rule. This long-term growth potential makes HSAs a valuable tool for retirement healthcare planning, as the funds remain accessible for qualified medical expenses at any point.