What to Do With an Old HSA Account You No Longer Contribute To

Health Savings Accounts (HSAs) help cover medical expenses with tax advantages, but changes in employment or health plans may leave you wondering how to manage an old account. Even if you’re no longer contributing, the funds remain yours and can be used in several ways. Understanding your options ensures you maximize benefits while avoiding unnecessary fees or tax consequences.

Rolling Over to Another Institution

If your HSA provider charges high fees or offers limited investment options, transferring to another institution can be beneficial. Some administrators impose maintenance fees that erode your balance, while others restrict investment choices, limiting growth potential. Moving to a provider with lower costs and better investment opportunities helps preserve savings.

A rollover allows you to transfer funds without tax consequences, but it must be done correctly. The IRS permits one rollover per 12-month period, and funds must be deposited into the new HSA within 60 days to avoid taxes and a 20% penalty if you’re under 65. A trustee-to-trustee transfer, where funds move directly between institutions, eliminates this risk and doesn’t count toward the one-rollover-per-year limit.

HSA providers vary in fees, investment options, and transfer policies. Some charge $20 to $50 to move funds, while others require specific paperwork or have processing delays. Researching these details beforehand ensures a smooth transition.

Leaving the Account as Is

If your HSA has low fees and strong investment options, keeping it open without further contributions can be a solid strategy. Unlike Flexible Spending Accounts (FSAs), which have a “use it or lose it” rule, HSA funds remain available indefinitely, allowing your balance to grow over time. Some providers offer interest-bearing cash accounts or investment options like mutual funds and ETFs.

HSAs can serve as long-term, tax-advantaged savings for medical expenses in retirement, covering Medicare premiums, long-term care, and out-of-pocket costs. They can also be used for COBRA coverage or healthcare expenses before Medicare eligibility.

Monitoring account fees and investment options is important, as providers may introduce changes. Reviewing statements ensures you’re not caught off guard by new charges. If unfavorable changes occur, switching providers may be necessary. Designating a beneficiary also ensures a smooth transfer upon the account holder’s passing, as HSAs follow different inheritance rules than retirement accounts.

Using Existing Funds

Even if you stop contributing, HSA funds remain available for qualified medical expenses, including doctor visits, prescriptions, dental and vision care, and certain over-the-counter items. The CARES Act expanded eligible expenses to include menstrual care products and non-prescription drugs.

HSAs also cover treatments insurance may not fully reimburse, such as physical therapy, acupuncture, and chiropractic care. Medical equipment like hearing aids, wheelchairs, and blood pressure monitors qualify as well. Those with chronic conditions can use funds for insulin, diabetes test strips, and CPAP machines.

HSA funds can reimburse past medical expenses, provided they were incurred after the account was opened. Unlike FSAs, there’s no deadline for reimbursement, allowing you to pay for medical costs out of pocket and withdraw the same amount later. Keeping detailed receipts ensures tax-free reimbursement when it’s most beneficial.

Income Tax Ramifications

HSA funds grow tax-free, but improper withdrawals create tax liabilities. Non-qualified distributions are subject to ordinary income tax and a 20% penalty if you’re under 65. After 65, the penalty disappears, but non-medical withdrawals are still taxed as regular income.

Tax consequences also apply when an HSA is inherited. If a spouse is the beneficiary, the account retains its tax-advantaged status. However, if a non-spouse inherits it, the balance becomes taxable income in the year of the original owner’s death, potentially creating a significant tax burden. Planning strategies, such as spending down the HSA on medical expenses or coordinating inheritances with other assets, can help mitigate this issue.

Closing the Account Entirely

Closing an HSA is an option but comes with financial and tax considerations. Some providers charge closure fees, typically between $25 and $50. Reviewing the institution’s policies can help minimize unnecessary costs.

Withdrawing the full balance for non-medical expenses makes the funds taxable as ordinary income, with a 20% penalty if you’re under 65. A tax-efficient approach is to spend down the balance on qualified healthcare expenses before closing the account. If no immediate medical costs exist, reimbursing past expenses—provided receipts were saved—allows for tax-free withdrawals.