My HSA Account Was Closed. How Can I Transfer or Access My Funds?

Health Savings Accounts (HSAs) are valuable tools for managing healthcare expenses, offering tax advantages and the ability to save for future medical costs. However, account holders may face unexpected closures of their HSA accounts, leading to confusion about accessing or transferring funds.

Common Reasons for HSA Account Closure

HSAs can be unexpectedly closed for several reasons, often leaving account holders uncertain about the next steps. One common cause is failing to maintain eligibility requirements. HSAs are designed for individuals with high-deductible health plans (HDHPs), and switching to a non-qualifying health plan can result in account closure due to non-compliance with IRS regulations.

Inactivity or failure to meet minimum balance requirements is another reason for account closure. Some providers impose fees or close accounts that fall below a certain balance. Dormant accounts, typically those with no transactions for an extended period, may also be closed depending on the provider’s policies.

Administrative issues or changes in provider policies can also lead to closure. Mergers, acquisitions, or account consolidations may result in closures if the new institution does not support certain account types. Additionally, discrepancies in personal information or unresolved disputes can prompt providers to close accounts to mitigate risks.

Retrieving or Transferring Remaining Funds

When an HSA account is closed, account holders need to explore options to retrieve or transfer their remaining funds to continue covering healthcare expenses.

Rollover to Another HSA

One option is a tax-free rollover of HSA funds, which must be completed within 60 days of receiving the distribution to avoid tax and penalties. This involves withdrawing funds from the closed account and depositing them into a new HSA. It’s crucial to meet the 60-day deadline to prevent the distribution from being treated as taxable income, which could incur a 20% penalty for account holders under 65 if the funds are not used for qualified medical expenses. When selecting a new HSA provider, consider factors like fees and investment options to ensure compatibility with your healthcare needs.

Cash-Out Option

Cashing out the remaining funds provides immediate access but comes with significant tax implications. Distributions not used for qualified medical expenses are subject to ordinary income tax. For those under 65, an additional 20% penalty applies. For example, cashing out $5,000 in the 22% tax bracket would result in $1,100 in taxes and a $1,000 penalty, leaving $2,900. This option may suit those needing immediate liquidity but should be approached with caution. A tax professional can help assess the financial impact.

Trustee-to-Trustee Transfer

A trustee-to-trustee transfer allows funds to move directly between financial institutions managing the HSAs without triggering tax consequences. This process avoids the risk of missing the 60-day rollover deadline and maintains the tax-advantaged status of the funds. To initiate this transfer, account holders should contact both the current and new HSA providers to confirm they support the process and understand any associated fees or requirements.

Tax and Possible Penalty Considerations

Understanding IRS guidelines is essential to avoid unexpected tax liabilities when an HSA is closed. Distributions not used for qualified medical expenses are subject to ordinary income tax, potentially pushing the account holder into a higher tax bracket. For instance, withdrawing $10,000 for non-qualified expenses in the 24% tax bracket would result in $2,400 in taxes.

For individuals under 65, the IRS imposes a 20% penalty on non-qualified distributions. A $10,000 withdrawal would incur $2,000 in penalties, reducing the withdrawal’s value significantly. Timing is also critical—rollovers and trustee-to-trustee transfers must be completed within specific deadlines to retain tax advantages. Missing these deadlines can result in distributions being classified as taxable income and subject to penalties.

Additionally, the IRS sets annual contribution limits for HSAs, which are $3,850 for individuals and $7,750 for families in 2024, with a $1,000 catch-up contribution for those 55 and older. Exceeding these limits can result in excise taxes, making careful planning and record-keeping vital.

Starting a New HSA with a Different Provider

Starting a new HSA with a different provider requires evaluating options to align the account with your financial goals and healthcare needs. Providers vary in fee structures, investment opportunities, and customer service. Comparing these factors can help identify a provider offering competitive terms, such as low fees and diverse investment options.

Opening a new HSA typically involves completing an application, providing personal and financial information, and selecting investment options if available. It’s also important to ensure the provider complies with IRS regulations to maintain the account’s tax benefits. Some providers offer tools like online portals or mobile apps to help manage healthcare expenses, enhancing the overall user experience.