Can You Roll Over Your Health Savings Account?

Health Savings Accounts (HSAs) are tax-advantaged savings vehicles designed for healthcare expenses, typically associated with a high-deductible health plan (HDHP). HSAs offer significant tax benefits. A key feature of HSAs is their portability, meaning funds are not tied to a specific employer or health plan. Account holders retain ownership and can move or transfer funds between different HSA providers, allowing effective management of healthcare savings regardless of employment or insurance changes.

Understanding HSA Rollovers

An HSA rollover moves funds from one Health Savings Account to another without incurring taxes or penalties, provided specific Internal Revenue Service (IRS) rules are followed. This process allows individuals to consolidate healthcare savings or seek a provider that better aligns with their financial goals, such as lower administrative fees, more investment options, or improved customer service. Consolidating multiple HSA accounts can also streamline financial management.

There are two primary methods for transferring HSA funds: direct and indirect rollovers. A direct rollover, also known as a trustee-to-trustee transfer, moves funds directly from the old HSA custodian to the new one. The account holder never takes possession of the funds, making it a preferred and secure method that minimizes risk of errors or missed deadlines.

An indirect rollover, often called a 60-day rollover, requires the account holder to receive a distribution from their existing HSA. The individual then has a strict 60-day window to deposit the entire amount into a new HSA. This method places responsibility on the account holder and carries a higher risk due to the critical deadline and potential for significant tax consequences.

Rules Governing HSA Rollovers

IRS rules govern HSA rollovers, particularly regarding frequency and timing, to ensure their tax-advantaged status. For indirect rollovers, a “one rollover per year” rule applies. An individual can complete only one indirect rollover across all their HSAs and IRAs combined within a 12-month period, starting from the date funds are received. Exceeding this limit can result in the distribution being treated as taxable income and subject to penalties.

Direct trustee-to-trustee transfers are not subject to the one-per-year rule. Individuals can initiate an unlimited number of these direct transfers between HSA custodians, offering greater flexibility for managing and consolidating accounts. This makes direct transfers a more convenient option for those who need to move funds frequently or consolidate multiple accounts.

The 60-day deadline for indirect rollovers is strict. If distributed funds are not deposited into a new HSA within this timeframe, the entire amount becomes a taxable withdrawal, subject to ordinary income tax and a potential 20% penalty if the account holder is under age 65. Properly executed rollovers, whether direct or indirect, are not considered taxable distributions and avoid these penalties, maintaining the tax-free growth of the funds.

All funds within an HSA are eligible for rollover. Tax reporting involves specific forms: Form 1099-SA from the old custodian for distributions, and Form 5498-SA from the new custodian for contributions. These forms are crucial for accurate tax reporting on IRS Form 8889, demonstrating the rollover was completed correctly and funds retained their tax-exempt status.

Process for Completing an HSA Rollover

Initiating an HSA rollover begins with careful research and selection of a new HSA provider. Individuals should compare options based on factors such as investment choices, administrative fees, and the quality of customer service. Once a new provider is chosen, open a new HSA account with that institution before proceeding with any transfer of funds. This ensures a destination account is ready to receive the assets.

For a direct rollover, also known as a trustee-to-trustee transfer, the process is typically initiated by the new HSA provider. The account holder contacts their chosen new custodian and completes a specific transfer request form. This form generally requires providing details about the old HSA, such as the account number and the name and address of the previous custodian. The new provider then communicates directly with the old custodian to arrange the transfer of funds.

The old HSA custodian processes the transfer upon receiving the request from the new provider. In most cases, the funds are sent directly to the new custodian, often via a check or electronic transfer, without the account holder physically handling the money. It is advisable for the account holder to monitor the progress of the transfer, as timeframes can vary between providers, sometimes taking several weeks to complete. This method eliminates the account holder’s responsibility for re-depositing funds, reducing potential risks.

To complete an indirect rollover, the account holder must contact their current HSA custodian to request a distribution of funds. This distribution is often disbursed as a check mailed directly to the account holder. Upon receiving the funds, the account holder assumes full responsibility for depositing the entire amount into their new HSA within the strict 60-day deadline. Meticulous record-keeping is essential, including copies of checks, deposit slips, and bank statements, to document that the rollover was completed within the required timeframe.