How to Roll Over an HSA and Avoid Tax Penalties

Health Savings Accounts (HSAs) serve as tax-advantaged savings vehicles designed to help individuals cover qualified medical expenses. These accounts offer a triple tax benefit: contributions may be tax-deductible, earnings grow tax-free, and withdrawals for eligible expenses are tax-free. Individuals often choose to move their HSA funds from one custodian to another, a process known as an HSA rollover. This allows account holders to consolidate funds or seek out providers offering more favorable terms or investment options.

Types of HSA Transfers

Moving funds between Health Savings Accounts can be accomplished through two primary methods. One method involves a direct transfer of funds from one HSA custodian to another, known as a trustee-to-trustee transfer. The account holder never takes physical possession of the funds, which minimizes the risk of tax complications.

The second method is an indirect rollover, sometimes called a 60-day rollover. The account holder receives a distribution directly from their existing HSA. They then have a strict 60-day window from the date of receiving the funds to deposit them into a new or existing HSA. Missing this deadline can result in the distributed amount being considered taxable income and potentially subject to additional penalties.

Preparing for Your HSA Rollover

Before initiating an HSA rollover, gathering necessary information and making informed decisions is a crucial preparatory step. While eligibility for new HSA contributions generally requires enrollment in a High-Deductible Health Plan (HDHP), this health plan requirement does not apply to merely holding an HSA or performing a rollover. Individuals should collect specific details for both their current HSA, such as the account number and the custodian’s contact information, and for the new HSA they intend to use. Knowing the current balance is also important.

Selecting a new HSA custodian involves evaluating various factors to ensure the chosen provider aligns with individual financial goals. Compare custodians based on their fee structures, which might include monthly maintenance, investment, or transaction costs. Review available investment options, such as mutual funds or exchange-traded funds, is also important if the account holder plans to invest their HSA funds. Assess customer service quality and ease of online account management.

After identifying a new custodian, contact both your current and prospective HSA providers to understand their specific rollover procedures. Each financial institution may have unique forms, authorization requirements, or preferred methods for facilitating asset transfers. Inquire about any potential transfer-out fees from the current custodian or transfer-in fees from the new custodian to avoid unexpected costs. This thorough preparation ensures a smoother transition of HSA funds.

Executing a Direct Rollover

A direct trustee-to-trustee HSA rollover typically begins by contacting the new HSA custodian. The receiving institution usually provides forms to initiate an inbound transfer from the previous custodian. These forms authorize the direct movement of funds and include instructions for both the account holder and the transferring institution. Completing them accurately helps avoid delays.

The forms generally require information gathered during preparation, such as the existing HSA account number and the exact amount to be transferred. Some forms may also request the current HSA custodian’s name and contact details. Once you submit the paperwork to the new custodian, that institution typically communicates directly with the old custodian. This facilitates the transfer of funds without you ever possessing the money.

After the transfer is initiated, the process can take several business days or even a few weeks, depending on the custodians involved. Monitor both the old and new HSA accounts to confirm the transfer. Checking online statements or contacting customer service can verify that funds have moved out of the old account and into the new one. This confirmation ensures the direct rollover has been successfully executed.

Executing an Indirect Rollover

An indirect HSA rollover begins by requesting a distribution from your current HSA custodian. This request can be made through an online portal, by phone, or by submitting a distribution form. Funds may be sent as a check or transferred electronically to a linked bank account. Receiving the funds directly places responsibility on the account holder to complete the rollover within the specified timeframe.

Upon receiving distributed HSA funds, a strict 60-day deadline begins for depositing the entire amount into a new or existing HSA. This 60-day window is measured from the date funds are received, not the date they are requested or mailed. Failure to deposit the full amount within this period results in a taxable withdrawal. Such a withdrawal is included in gross income and may be subject to a 20% penalty if the account holder is under age 65 and not disabled.

To complete the indirect rollover, deposit the received funds into the new HSA within the 60-day limit. The new HSA custodian will likely require forms to designate incoming funds as a rollover contribution, ensuring they are not treated as a regular contribution. Maintain clear documentation of the distribution and subsequent deposit for tax reporting. The new custodian typically reports the rollover contribution on Form 5498-SA for the tax year of the deposit.

Key Rules and Record Keeping

Understanding Internal Revenue Service (IRS) rules is important when managing HSA rollovers, particularly regarding frequency limitations. An indirect HSA rollover is limited to one per 12-month period across all HSAs. This limitation applies from the date the distribution was received, not the date it was rolled over. Direct trustee-to-trustee transfers are not subject to this 12-month restriction, allowing more frequent movements.

Accurate tax reporting is important for any HSA rollover to ensure the transaction is not erroneously treated as a taxable distribution. The old HSA custodian issues Form 1099-SA, reporting the distribution of funds. The new HSA custodian issues Form 5498-SA, which reports contributions to the new HSA, including rollovers. Report the rollover correctly on IRS Form 8889, Health Savings Accounts (HSAs), filed with your tax return, to avoid taxation.

Maintain meticulous records of all HSA rollover transactions for compliance and future reference. This includes keeping copies of all forms submitted to both custodians, statements showing the distribution and subsequent deposit, and any correspondence related to the transfer. These records should be kept for at least three years from the tax filing deadline for the year in which the rollover occurred.