Do Health Savings Accounts Rollover?

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals save and pay for qualified medical expenses. These accounts are available to those enrolled in a High Deductible Health Plan (HDHP) and offer a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible medical costs. Unlike some other benefit plans, HSA funds do indeed roll over from year to year.

The Core Principle of HSA Rollover

Any unused funds in a Health Savings Account at the end of a calendar year automatically carry over to the next year. This means there is no “use-it-or-lose-it” provision, providing account holders with long-term financial flexibility for healthcare costs. The money remains in the account indefinitely, continuing to accumulate and potentially grow tax-free over time, allowing individuals to build a reserve for future medical expenses, including those in retirement.

Portability of HSA Funds

Health Savings Accounts are individually owned, meaning the funds belong to the account holder, not an employer or health plan. This ensures the account remains with the individual even when changing jobs, health insurance providers, or relocating. If an individual changes jobs or no longer has an HDHP, they cannot contribute new funds to the HSA, but they retain full access to the existing balance for qualified medical expenses at any time, regardless of current health plan enrollment.

Moving HSA Funds Between Providers

Account holders can move existing HSA funds from one HSA custodian to another to consolidate accounts or seek better investment options. This process involves contacting both the current and new HSA providers to initiate the transfer. There are two primary methods for moving these funds: a trustee-to-trustee transfer or an indirect rollover.

A trustee-to-trustee transfer, also known as a direct transfer, is the preferred method. In this process, funds are moved directly between financial institutions without the account holder taking physical possession of the money. This method avoids potential tax implications and has no limit on how many times it can be performed within a year.

Alternatively, an indirect rollover involves the HSA holder receiving a check or direct deposit from their current custodian. The account holder then has 60 days from the date of receipt to deposit these funds into a new HSA. Adhering to this 60-day deadline is important, as missing it can result in the funds being considered a taxable withdrawal, subject to income tax and a 20% penalty. The IRS limits indirect rollovers to one per 12-month period across all HSAs held by the individual. Reporting an indirect rollover requires filing IRS Form 8889 with your tax return.

Bringing Funds Into Your HSA

Funds from other types of accounts can be moved into an HSA. The most notable is a one-time, tax-free rollover from an Individual Retirement Arrangement (IRA) to an HSA. This unique transfer is a lifetime opportunity and is limited to the IRS annual HSA contribution limit for the year of the transfer, including any catch-up contributions for those aged 55 and older. Note that funds from other retirement accounts, such as 401(k)s, cannot be directly rolled into an HSA.

IRA Rollover Requirements

To qualify for an IRA-to-HSA rollover, the individual must be eligible to contribute to an HSA at the time of the transfer, meaning they must be covered by an HDHP. A key requirement is the “testing period,” where the individual must remain an HSA-eligible individual for at least 12 months following the month the distribution is contributed to the HSA. Failure to maintain eligibility during this period, except in cases of death or disability, results in the rolled-over amount being included in gross income and subject to a 10% additional tax.