What Happens to Your HSA If You Quit Your Job?

Health Savings Accounts (HSAs) offer a practical way to save for medical expenses while enjoying tax advantages. Yet, many employees are uncertain about what happens to their HSA when they leave a job. This confusion can make it challenging to manage these funds effectively after employment changes.

Understanding the implications of quitting a job on your HSA is key to making informed financial decisions. By clarifying account ownership, contribution eligibility, and potential fees, you can maximize the long-term benefits of this asset.

Ownership of the Account

When you leave your job, your Health Savings Account (HSA) remains your property. Unlike other employer-sponsored benefits that may be lost upon leaving, the HSA is individually owned. This means the funds in your HSA are yours to manage and use, regardless of your employment status. The account’s portability ensures you can carry it with you as you transition between jobs or into retirement.

The ownership of an HSA is governed by IRS regulations, which guarantee that the account holder maintains control. This allows you to decide how to manage the funds, whether by keeping them in a savings account or exploring investment options for potential higher returns.

Eligibility for New Contributions

Your ability to make new contributions to your HSA after leaving a job depends on your health insurance coverage. To contribute, you must be enrolled in a high-deductible health plan (HDHP). For 2024, an HDHP is defined by the IRS as having a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage.

If your new job offers HDHP coverage, you can continue contributing to your HSA, up to the 2024 limits of $4,150 for individuals and $8,300 for families. An additional $1,000 catch-up contribution is allowed if you are 55 or older. These limits apply regardless of employment changes, as long as you maintain HDHP coverage.

If your new health plan does not qualify as an HDHP, you cannot make further contributions. However, you can still use the funds in your HSA for qualified medical expenses, ensuring that the account remains a valuable tool for managing healthcare costs.

Withdrawing Funds for Qualified Expenses

Funds withdrawn from an HSA for qualified medical expenses are tax-free, making the account an effective way to manage healthcare costs. Qualified expenses include a wide range of medical services such as doctor visits, prescription medications, and certain over-the-counter drugs. The IRS Publication 502 provides a detailed list of eligible expenses.

It’s crucial to keep accurate records of all medical expenses paid with HSA funds. The IRS requires proof of qualified expenses in case of an audit, so retaining receipts and documentation is essential. Using digital tools or apps for expense tracking can simplify this process and help monitor account balances for future planning.

Withdrawals for non-qualified expenses are subject to income tax and a 20% penalty. However, once you turn 65, the penalty is waived, allowing you to use the funds for any purpose. Non-medical withdrawals after 65 are still subject to income tax, but this added flexibility can make the HSA a useful part of your retirement strategy.

Possible Fees or Penalties

While HSAs offer tax advantages, they may come with fees. These can vary by financial institution and may include monthly maintenance fees, typically between $2 and $5, though these are often waived if you maintain a minimum balance, usually around $1,000. Reviewing your account’s fee schedule can help you avoid unnecessary costs.

Transaction fees may also apply, especially if your HSA includes investment options. For example, buying and selling stocks within your HSA might incur brokerage fees, which can reduce your overall returns. Comparing providers can help you find one with lower fees, improving your account’s efficiency.

Rollover or Transfer Options

After leaving a job, you may consider rolling over or transferring your HSA funds. A rollover involves moving your HSA funds to another HSA with a different financial institution while maintaining the tax-advantaged status. This must be completed within 60 days to avoid tax implications.

Alternatively, direct transfers allow you to move funds directly from one HSA trustee to another without taking possession of the money. This reduces the risk of penalties or taxes and is useful for consolidating accounts or accessing better investment options and lower fees.

Rollovers are limited to one per year, while direct transfers have no such restrictions. Carefully evaluating factors like fees, investment choices, and customer service can help you decide whether to roll over or transfer your HSA. Making informed decisions ensures your HSA remains a valuable part of your overall financial strategy.