Do HSAs Roll Over? What to Know About Your Funds

A Health Savings Account (HSA) functions as a tax-advantaged savings account designed for healthcare expenses. It allows individuals to set aside money on a pre-tax basis to cover qualified medical costs. To be eligible, individuals must be enrolled in a high-deductible health plan (HDHP). These plans typically feature lower monthly premiums but require individuals to pay more out-of-pocket before insurance coverage begins. Many wonder if these funds expire, similar to some other health spending options.

Understanding HSA Carryover

HSA funds do not expire; they automatically roll over from year to year. This distinguishes HSAs from Flexible Spending Accounts (FSAs), which typically operate under a “use-it-or-lose-it” rule. Unused FSA funds may be forfeited at year-end, though some employers offer limited carryover or grace periods. The money in an HSA remains available for future qualified medical expenses indefinitely. This automatic carryover allows account holders to build substantial savings for healthcare needs over time.

Using HSA Funds

Funds within an HSA can be used for a wide range of qualified medical expenses. These expenses generally include costs for diagnosis, treatment, or prevention of disease, such as doctor visits, prescriptions, dental care, and vision care. The Internal Revenue Service (IRS) provides detailed guidance on qualified medical expenses in publications like IRS Publication 502. Withdrawals for these qualified medical expenses are entirely tax-free.

Using HSA funds for non-qualified expenses before age 65 incurs financial consequences. Such withdrawals are subject to income tax and an additional 20% penalty. For example, a $1,000 non-qualified withdrawal could result in $200 in penalties plus applicable income taxes. After age 65, the 20% penalty is waived, but non-qualified withdrawals remain subject to income tax, similar to withdrawals from a traditional Individual Retirement Account (IRA).

Investing HSA Funds

HSAs allow individuals to invest unused funds, enabling the account balance to grow over time. Many HSA providers offer various investment options, including mutual funds, stocks, bonds, and exchange-traded funds, similar to retirement accounts. This investment capability contributes to the “triple tax advantage” of an HSA. Contributions are tax-deductible or made pre-tax, investment growth is tax-free, and qualified withdrawals are also tax-free.

Investing funds enhances the long-term value of the HSA’s carryover feature. An HSA balance could potentially grow over decades, providing a substantial resource for future healthcare costs. Some providers may require a minimum cash balance, typically around $1,000, before allowing funds to be invested. This strategic investment approach can transform an HSA into a retirement savings vehicle for healthcare expenses.

Long-Term HSA Management

The portability of an HSA means the account belongs to the individual, not the employer. This allows the account holder to retain the HSA even when changing jobs or leaving employment. The funds continue to roll over and remain available for use regardless of employment status. This portability makes HSAs a flexible tool for long-term healthcare planning.

HSA funds are beneficial in retirement, especially after enrolling in Medicare. While contributions to an HSA cease once an individual enrolls in Medicare, existing funds can still be used for qualified medical expenses, including Medicare premiums for Part A, Part B, and Part D prescription drug coverage. After age 65, the penalty for non-qualified withdrawals is removed, though such withdrawals are still subject to income tax. Individuals can also designate beneficiaries for their HSA. A spouse beneficiary can inherit the account tax-free and continue to use it as their own HSA, while non-spouse beneficiaries generally must include the fair market value of the account in their gross income.