What to Know About HSA Rollover Rules
Moving funds into an HSA requires navigating specific rules and reporting. Understand how to complete a transfer correctly to protect its tax-free status.
A Health Savings Account (HSA) is a tax-advantaged account for individuals with high-deductible health plans to pay for medical expenses. The funds in an HSA carry over annually, but you can also build your balance by moving funds from other accounts through a rollover. This process allows you to consolidate savings, but it is governed by specific Internal Revenue Service (IRS) regulations. Understanding these rules is necessary for executing a rollover correctly and avoiding potential taxes and penalties.
Permitted Funding Sources for a Rollover
The most common source for a rollover is another HSA. If you have multiple HSAs, you can consolidate them into a single account to simplify management and reduce administrative fees. Moving funds from one HSA to another is considered a transfer and does not count toward your annual contribution limit.
A one-time transfer from an Individual Retirement Arrangement (IRA) is another option. This transaction, known as a Qualified HSA Funding Distribution (QHFD), allows you to move funds from a Traditional or Roth IRA into your HSA. This can be a way to convert tax-deferred retirement funds into tax-free healthcare funds, though specific rules apply.
It is also necessary to know which accounts cannot be rolled over into an HSA. You cannot directly roll over funds from most employer-sponsored retirement plans, such as a 401(k) or 403(b). Funds from a Flexible Spending Account (FSA) or a Health Reimbursement Arrangement (HRA) are also not eligible. Attempting to move money from these sources is an excess contribution that leads to tax consequences.
Governing Rules and Limitations
The 60-day rollover rule applies to indirect rollovers, which occur when you receive a check for the funds from your old account. You have 60 days from the date you receive the funds to deposit them into the new HSA. If you miss this deadline, the entire amount is treated as a taxable distribution and may be subject to a 20% penalty.
A one-rollover-per-year rule applies to indirect HSA rollovers. You may only perform one indirect rollover within any 12-month period, and this limit is per person, not per account. This restriction does not apply to direct trustee-to-trustee transfers, where funds move between financial institutions without you taking possession of them.
An IRA-to-HSA transfer, or QHFD, is a once-in-a-lifetime event. The amount you can transfer is limited to your maximum annual HSA contribution for that year, including catch-up contributions if you are age 55 or older. This transfer counts toward your annual limit. To keep the transfer tax-free, you must remain an HSA-eligible individual for a 12-month “testing period” after the transfer. Failing to maintain eligibility will make the transferred amount taxable income and subject it to a 10% penalty.
Completing an HSA Rollover or Transfer
The most common method is a direct rollover, also called a trustee-to-trustee transfer. In this process, you authorize your new HSA provider to request the funds directly from your old HSA or IRA custodian. The two financial institutions then manage the transfer of assets between them without you personally handling the funds.
This method is preferred because it eliminates the risk of missing the 60-day deposit window. It is also not subject to the one-rollover-per-year limitation that applies to some HSA-to-HSA movements. The transfer may take several business days to a few weeks to complete.
The alternative is an indirect rollover. You request a distribution from your current HSA or IRA provider, and they will issue you a check. You are then responsible for depositing it into your new HSA within the 60-day timeframe to avoid taxes and penalties. When making the deposit, designate it as a “rollover contribution” so it is not counted against your annual contribution limit.
Tax Filing and Documentation
Properly reporting an HSA rollover on your annual tax return is necessary. You will receive tax forms from the financial institutions involved that provide the IRS with the details of the fund movements.
The custodian of your original HSA will issue Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. This form reports the gross distribution amount from your account. You must correctly report this transaction on your tax return to show it was a non-taxable rollover.
For a Qualified HSA Funding Distribution from an IRA, you will receive Form 1099-R. This form shows the amount distributed from your IRA. You must report this transaction correctly to show the funds were moved to an HSA and are not taxable.
This information is consolidated on Form 8889, Health Savings Accounts (HSAs), which you file with your tax return. You will report the total distribution and specify the amount that was part of an HSA-to-HSA rollover. For an IRA-to-HSA rollover, you report the amount separately on the form. Properly reporting the rollover ensures the IRS does not count the distribution as taxable income.