Can You Transfer an HSA? Here’s What You Need to Know

Health Savings Accounts (HSAs) offer a tax-advantaged way to save for healthcare expenses, providing a unique benefit for individuals enrolled in high-deductible health plans. These accounts allow contributions to be made on a pre-tax basis, funds to grow tax-free, and qualified withdrawals to be tax-free. HSAs are portable, meaning the funds belong to the account holder even if they change employers or health plans. Understanding how to transfer these funds is important for managing healthcare savings effectively.

Understanding HSA Transfers

Individuals often consider transferring their HSA funds for various reasons. Consolidating multiple HSAs into a single account can simplify financial management, making it easier to track balances and expenses. Some individuals seek to move their funds to a new provider offering lower administrative fees, better investment options, or improved customer service.

There are two primary methods for moving HSA funds: a direct trustee-to-trustee transfer and an indirect rollover. The fundamental difference lies in how the funds are handled during the process. In a direct transfer, the funds move directly between financial institutions without the account holder ever taking possession of the money. An indirect rollover, conversely, involves the account holder receiving the funds before redepositing them into a new HSA.

Executing a Direct Trustee-to-Trustee Transfer

A direct trustee-to-trustee transfer is the most straightforward and secure method for moving HSA funds. This process involves the new HSA custodian working directly with your current custodian to facilitate the transfer of assets.

The new custodian will typically provide the necessary transfer forms. Completing these forms authorizes your current HSA custodian to release the funds directly to the new institution. Since the funds never pass through your hands, this method avoids any potential tax implications or penalties.

The processing time for a direct transfer can vary, generally taking anywhere from two to eight weeks, depending on the responsiveness of the current custodian. Some providers may require the liquidation of investments before the transfer, while others support in-kind transfers of securities. It is advisable to inquire about any potential fees the current custodian might charge for an outgoing transfer.

Performing an Indirect Rollover

An indirect rollover provides an alternative method for transferring HSA funds, though it involves more responsibility for the account holder. This process begins with requesting a distribution or withdrawal of funds from your current HSA custodian. The funds are then sent directly to you.

Upon receiving the funds, you are responsible for depositing the entire amount into a new or existing HSA with a different custodian. A strict Internal Revenue Service (IRS) rule requires this redeposit to occur within 60 calendar days of receiving the distribution. Failing to meet this 60-day deadline will result in the distribution being considered taxable income, potentially subject to ordinary income tax and a 20% penalty.

Another important rule governing indirect rollovers is the one-rollover-per-12-month limitation. This rule applies to all IRAs and HSAs combined, meaning you can only perform one indirect rollover across all your retirement and health savings accounts within any 12-month period, starting from the date you receive the funds. This limitation makes direct trustee-to-trustee transfers a more flexible option for those needing to move funds more frequently.

Important Considerations for Your HSA Transfer

Properly executed HSA transfers, whether direct or indirect, are tax-free events. For direct trustee-to-trustee transfers, there are no tax consequences as the funds never enter the account holder’s possession. For indirect rollovers, adhering to the 60-day redeposit rule and the one-rollover-per-12-month limit ensures the transaction remains tax-exempt. Missing the 60-day window or exceeding the frequency limit for indirect rollovers can lead to the distribution being fully taxable as ordinary income, along with a potential 20% penalty on the withdrawn amount.

While direct transfers have no frequency limitations, indirect rollovers are restricted to one every 12 months across all an individual’s HSAs and IRAs. Choosing a new HSA provider involves evaluating several factors, including administrative fees, the range and quality of investment options, customer service quality, and the ease of managing the account online or through mobile applications.

After funds are transferred, the status of the old HSA account should be confirmed. Any small residual balances in the old account should be addressed, as some providers may charge fees for inactive accounts or low balances. Maintaining thorough documentation of the transfer, including forms, confirmations, and dates, is also important for personal records and for tax purposes.