What Happens to My HSA If I Switch to a Low Deductible Plan?

Individuals covered by a High-Deductible Health Plan (HDHP) often establish a Health Savings Account (HSA) to manage healthcare costs. An HSA is a tax-advantaged savings account offering a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Switching from an HDHP to a low-deductible health plan raises questions about the continued use and implications for an existing HSA.

Impact on Future Contributions

Switching from a High-Deductible Health Plan (HDHP) to a low-deductible health plan immediately affects your eligibility to contribute new funds to your Health Savings Account. Once you are no longer covered by an HDHP, you become ineligible to make new contributions to your HSA. This ineligibility typically takes effect on the first day of the month following the change in your health coverage. To contribute to an HSA, you must meet specific Internal Revenue Service (IRS) requirements: you must be covered by an HDHP on the first day of the month, have no other health coverage except permitted coverage, not be enrolled in Medicare, and not be claimed as a dependent on someone else’s tax return. If your new low-deductible plan does not meet the HDHP criteria, you cannot add more money to your HSA. However, any funds already accumulated in your HSA remain yours.

Utilizing Existing HSA Funds

Even after transitioning to a low-deductible health plan and losing eligibility to make new contributions, funds already in your Health Savings Account remain accessible. These funds can continue to be used tax-free for qualified medical expenses for yourself, your spouse, and your dependents, regardless of their health plan coverage. Qualified medical expenses include doctor visits, prescription medications, dental care, vision care, and certain over-the-counter medicines. You can use these funds at any time, whether immediately after your plan switch or years later.

Ongoing Account Management

After you lose eligibility to contribute, your Health Savings Account generally remains open and active with your financial institution. Funds within your HSA can continue to grow on a tax-free basis, especially if your account offers investment options. This long-term growth potential is an advantage, as the money is not subject to a “use-it-or-lose-it” rule like some other health accounts. Financial institutions may charge administrative fees for maintaining the HSA, so it is prudent to be aware of any such costs. Your HSA is portable, meaning the funds belong to you, not your employer or specific health plan. You can transfer your HSA to a different provider if you find a more suitable account with better investment choices or lower fees.

Tax Considerations for Withdrawals

Withdrawals from your Health Savings Account for qualified medical expenses remain tax-free, even after you switch to a low-deductible health plan. This allows you to pay for healthcare costs with pre-tax dollars. Maintain records, such as receipts, to substantiate withdrawals for qualified medical expenses in case of an IRS inquiry. Before age 65, non-qualified HSA withdrawals are subject to income tax and a 20% penalty. After age 65, the penalty is waived, but non-qualified withdrawals are still taxed; Form 1099-SA reports distributions, and Form 8889 must be filed with your tax return.