What Happens to an HSA if You Change Insurance?

A Health Savings Account (HSA) is a tax-advantaged savings account for qualified medical expenses. It offers a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for eligible healthcare costs are also tax-free. An HSA is linked to enrollment in a High Deductible Health Plan (HDHP). Understanding how an HSA operates when health insurance plans change is important for managing healthcare finances.

Eligibility for Future Contributions

Eligibility to contribute new funds to an HSA is tied to an individual’s enrollment in a High Deductible Health Plan (HDHP). If an individual’s new insurance plan qualifies as an HDHP, they can generally continue making contributions, subject to the annual limits set by the Internal Revenue Service (IRS). For 2025, the maximum contribution is $4,300 for self-only coverage and $8,550 for family coverage. Individuals aged 55 and older can contribute an additional $1,000 as a catch-up contribution.

A health plan qualifies as an HDHP for 2025 if it has a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. The plan’s annual out-of-pocket expenses, including deductibles and co-payments but not premiums, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage. If a new insurance plan does not meet these requirements, an individual becomes ineligible to make new contributions. Existing HSA funds remain accessible, but no new money can be added until re-enrollment in a qualifying HDHP.

If HDHP coverage changes mid-year, the annual contribution limit is prorated. Proration is based on the number of months an individual was eligible, determined by coverage status on the first day of each month. For example, six months of eligibility means half the annual maximum. A “last-month rule” allows full annual contributions if HDHP-eligible on December 1. However, this requires remaining HDHP-eligible for a “testing period” throughout the following calendar year. Failure to meet this results in excess contributions being added to taxable income and incurring a 10% additional tax.

Using Existing HSA Funds

Funds accumulated in an HSA are always the account holder’s property and remain accessible, regardless of insurance or employment changes. This means the money saved in an HSA does not expire and can continue to be used for qualified medical expenses. Even if no longer enrolled in an HDHP, the existing balance remains available.

Funds can be withdrawn tax-free for qualified medical expenses. These expenses generally include costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body. Examples include doctor’s office visits, prescription medications, dental care, vision care, and over-the-counter medicines and menstrual care products following the CARES Act of 2020. Health insurance premiums are generally not qualified medical expenses, with exceptions for individuals aged 65 and older who can use HSA funds for Medicare Parts A, B, or D premiums.

Using HSA funds for non-qualified expenses leads to tax consequences. Before age 65, non-qualified withdrawals are subject to income tax and an additional 20% penalty. For example, a $500 non-qualified withdrawal would incur a $100 penalty in addition to being taxed as ordinary income. At age 65, the 20% penalty is waived, but withdrawals remain subject to income tax if not used for qualified medical expenses.

Account Management and Portability

An HSA is a personal account, similar to a bank or investment account, and is not tied to a specific employer or health insurance provider. Individuals retain full control of their HSA funds even if they change jobs, switch insurance plans, or retire. The funds do not have a “use it or lose it” rule, allowing balances to roll over from year to year and potentially grow through investments.

HSAs can be held with various custodians, including banks, credit unions, or investment firms. To move HSA funds between custodians, perhaps to consolidate accounts or seek lower fees, individuals have two methods: a direct trustee-to-trustee transfer or a rollover. A direct transfer involves the original provider sending funds directly to the new custodian, with the account holder never taking possession of the money. This method has no frequency limit and avoids tax implications.

A rollover involves the account holder receiving funds, typically via check, and redepositing them into a new HSA within 60 days. While this offers direct control, it carries a risk: if funds are not deposited within 60 days, they are considered a taxable withdrawal and may incur a 20% penalty if under age 65. The IRS limits rollovers to one per 12-month period, unlike direct transfers. Consider account fees when choosing a custodian, as these can vary and impact HSA growth.