Health Savings Accounts (HSAs) are a powerful tool that helps US healthcare consumers save for medical expenses while enjoying significant tax benefits. These accounts are “triple tax-free”, which allows you to contribute pre-tax dollars, grow your savings tax-free, and withdraw funds for qualified medical expenses tax-free. But what happens when you change jobs, find an HSA provider that fits with your goals better, or simply just want to consolidate multiple HSAs? That’s where the options of an HSA rollover or trustee-to-trustee transfer come into play.
In this blog post:
- Why Consider an HSA Rollover or Transfer?
- How to Execute an HSA Transfer
- How to Execute an HSA Rollover
- Potential Pitfalls and How to Avoid Them
- Special Circumstances
- Benefits of Rollovers and Transfers
- Conclusion
Why Consider an HSA Rollover or Transfer?
Life is rarely static. You may switch employers, find a more attractive HSA provider with lower fees and better investment options, or decide to consolidate several existing HSAs into one for simplicity’s sake. In these and other situations, moving your HSA money without losing the valuable tax benefits is important.
HSA rollovers and transfers are the two primary methods to move your funds between HSA providers or accounts, and they are governed by specific rules and procedures. Though they may sound similar, they are not the same, and understanding the differences is key to completing these steps successfully and avoiding unnecessary taxes and penalties.
In this guide, we will walk you through a step-by-step process for both HSA rollovers and transfers. We’ll outline the key differences between these two options, provide a detailed breakdown of the steps involved in each, highlight potential pitfalls and how to sidestep them, and delve into special circumstances that may affect how you approach these transactions.
Whether you are a seasoned HSA consumer or new to the world of Health Savings Accounts, this guide is designed to empower you to take control of your HSA funds in the most effective and efficient way possible.
How to Execute an HSA Transfer
Transferring your HSA funds from one provider to another is a common and straightforward process that allows you to move your funds without tax penalties or consequences. The money is moved directly from one HSA provider to the other, without it passing through the hands of the account holder.
Below is a step-by-step guide to executing an HSA transfer seamlessly:
Step 1: Contact Your Current HSA Provider
Before starting a transfer, reach out to your current HSA provider. Tell them that you intend to move your HSA money and ask if there are any forms you may need to complete, or fees you would need to pay with a transfer. Take note of any specific requirements (such as liquidating investments) or timelines they provide, as this information will be important to ensure a smooth transition.
Step 2: Open a New HSA (if you don’t have one already)
To transfer your funds, you will need another HSA to move them into. Research potential HSA providers carefully, considering factors such as fees, investment options, account features, and customer service. Once you’ve chosen a provider, complete the necessary paperwork to open a new HSA. Make sure to ask your new provider about any forms they require to accept the incoming transfer.
Step 3: Start the Transfer
With your new HSA established, you can now start the transfer. Your new HSA provider will likely have a form for you to complete that authorizes them to request the funds from your current HSA provider. Fill out this form completely and accurately. It will typically require your current HSA account information, your new HSA account information, and possibly additional identification verification.
Step 4: Confirm the Transfer
After you’ve started the transfer, it’s crucial to follow up and confirm that the funds have moved as expected. Check your statements from both your old and new HSA providers. Ensure the funds have been withdrawn from your old account and deposited into your new account without any issues. This step is important, as errors can occur, and catching them early is key. If you notice any discrepancies or have questions, reach out to your new HSA provider promptly for help.
A Few Important Notes:
Trustee-to-trustee transfers are not reported to the IRS as distributions, so they should not affect your taxes.
Unlike rollovers, there is no limit on how many times you can transfer funds between HSAs in a year.
Transfers can sometimes involve fees, so it’s always a good idea to check with both your old and new HSA providers.
How to Execute an HSA Rollover
An HSA rollover allows you to move funds from one HSA to another without tax penalties if executed correctly. Unlike a direct transfer, a rollover involves you personally receiving the funds before depositing them into the new account.
Here is a step-by-step guide to performing an HSA rollover:
Step 1: Request a Distribution
Begin by requesting a distribution of funds from your current HSA provider. This can typically be done through your online account portal, or by calling customer service and requesting a distribution. Specify that you are planning a rollover, so the funds aren’t mistakenly categorized as a regular withdrawal, which could lead to tax consequences.
Note: You may be required to liquidate any investment holdings you have in the HSA prior to receiving the distribution.
Step 2: Deposit the Distribution into a New HSA
Upon receiving the distribution from your old HSA, you have 60 days to deposit these funds into your new HSA. If you don’t already have a new HSA, you will need to open one during this time. Make sure to move the money within 60 days, or you could end up paying taxes and extra penalties on the distribution.
To deposit the funds into your new HSA, contact the new HSA provider and let them know you are executing a rollover. They will guide you through the process, which may involve completing a rollover contribution form.
Step 3: Report the Rollover to the IRS
When tax season arrives, you will need to report your HSA rollover to the IRS to confirm that you are not taxed on the distribution. This is done by filing IRS Form 8889 with your tax return. On this form, you will indicate that you made a rollover contribution, which lets the IRS know that the funds were not a regular distribution and should not be subject to tax or penalties.
A Few Important Notes:
You are allowed only one HSA rollover in a 12-month period.
The 60-day period is strict; not completing the rollover in this timeframe will result in the funds being treated as a regular, nonqualified taxable distribution, leading to the amount you withdrew being subject to income tax and you may also incur a 20% penalty.
Make sure to keep all documentation related to the rollover, including distribution and deposit confirmations, as you may need these when filing your taxes.
Remember: Performing an HSA rollover requires careful attention to detail and timing. Be proactive and diligent in each step to ensure that your funds keep their tax-advantaged status during the move.
Potential Pitfalls and How to Avoid Them
Moving your HSA money is usually simple, but mistakes can lead to unexpected taxes, fees, and headaches.
Below are some common pitfalls and strategies for avoiding them:
Pitfall 1: Missing the 60-Day Rollover Deadline
Solution: Mark your calendar with the 60-day deadline as soon as you receive the distribution from your old HSA. Set reminders and act well before the deadline to ensure the funds are deposited into your new HSA on time.
Pitfall 2: Mistaken Excess Contributions
If you’ve already contributed to your HSA for the year, a rollover could potentially be mistaken as an additional contribution, which might exceed your annual limit.
Solution: Clearly indicate to your new HSA provider that you are executing a rollover, not making a new contribution. Make sure the deposit is coded correctly and keep all relevant documentation.
Pitfall 3: Incurring Unnecessary Fees or Penalties
Some HSA providers may charge fees for transfers or distributions.
Solution: Contact both your old and new HSA providers before starting the process and inquire about any associated fees or penalties. You can then factor these costs into your decision and possibly negotiate or avoid them.
Pitfall 4: Not Reporting the Rollover to the IRS
Forgetting to report an HSA rollover on your taxes could lead to the IRS treating the funds as a taxable distribution.
Solution: When you file your taxes, make sure to complete IRS Form 8889, indicating that you made a rollover contribution. Keep copies of all documentation related to the rollover to substantiate your claims if necessary.
Pitfall 5: Executing Multiple Rollovers Within a 1-year Period
IRS rules allow only one HSA rollover during a 1-year period.
Solution: Keep a detailed record of the date you complete a rollover and avoid starting a new one within 1 year of that date. If you need to move funds again within this timeframe, consider using a direct trustee-to-trustee transfer instead, which does not have this restriction.
Conclusion:
Moving your HSA funds via a rollover or transfer is your right as the account holder, and it can be a smart move for various reasons. However, it’s a process that requires attention to detail and an understanding of the rules. Being proactive, organized, and informed is your best defense against these potential pitfalls, ensuring that your funds remain tax-advantaged and that you avoid unnecessary fees or penalties.
Remember: It’s always advisable to consult with a tax advisor or financial professional before initiating an HSA rollover or transfer, to ensure that you are fully compliant with IRS rules and that the move is in your best financial interest.
Special Circumstances
While the process of executing an HSA rollover or transfer is generally uniform, there are some special circumstances that can add complexity.
In this section, we highlight several of these special cases and provide guidance on how to navigate them:
Situation 1: Rollover or Transfer After a Job Change
Changing jobs often means changing health plans, and you might wish to move your HSA funds to a provider that is more aligned with your new situation.
Action: Contact your new employer’s benefits department to get information on the HSA providers they may work with directly. They may have a preferred provider and could help you with the rollover or transfer process.
Situation 2: Rollover from an IRA to an HSA
Did you know that you can roll over funds from a Traditional or Roth IRA into an HSA? This is known as a qualified HSA funding distribution, and it can usually only be done once in your lifetime.
Action: Speak with a financial advisor to see if this strategy aligns with your overall financial goals, and ensure you fully understand the tax implications. This process can be complicated, make sure to ask about the “testing period” that requires you to remain HSA eligible for 12 months after the rollover. This rollover counts as an HSA contribution and is subject to IRS HSA contribution limits.
Situation 3: Marriage and HSAs
If you get married and both you and your spouse have HSAs, you may wonder if and how you should consolidate these accounts.
Action: HSAs are individual accounts and cannot be jointly held, even after marriage. You and your spouse will unfortunately need to keep any existing HSAs separate. However, you can use money from your HSA to cover a spouse’s eligible medical expenses and most HSAs will allow you to get a second debit card.
Situation 4: Divorce and HSAs
In a divorce, dividing assets, including HSA funds, can be a complex process.
Action: Work with your attorney to understand how your HSA will be treated in the divorce settlement. If your ex-spouse is awarded part or all of your HSA in the divorce, specific steps should be followed to avoid taxes and penalties.
Situation 5: Death of HSA Holder
If an HSA holder dies, different rules apply based on who is designated as the beneficiary.
Action: It’s essential to have a designated beneficiary for your HSA. If your spouse is the beneficiary, they can inherit your HSA as if it were their own. If the beneficiary is not your spouse, the account stops being an HSA and becomes taxable to the beneficiary in the year in which you die. Ensure you have updated beneficiaries on file and consult with an estate planning attorney for advice.
Conclusion:
Life’s circumstances can have an impact on your strategy and execution of HSA rollovers and transfers. These special situations often involve additional legal and tax complexities. As with all significant financial moves, it’s best to consult with a knowledgeable tax advisor or financial professional who can guide you based on your unique circumstances.
Benefits of Rollovers and Transfers
Rolling over or transferring your HSA funds can provide significant advantages, depending on your financial and life situation.
Here are some of the key benefits:
Benefit 1: Consolidation of Funds
Performing a rollover or transfer allows you to consolidate multiple HSAs into a single account, making it easier to manage your savings and investments.
Benefit 2: Better Investment Options
Switching to a new HSA provider may grant you access to better investment options for your goals, potentially leading to higher returns on your HSA funds over time.
Benefit 3: Lower Fees
By shopping around for a new HSA provider, you may find one that offers lower fees, allowing your savings to grow more efficiently. When comparing fees among HSA providers, remember to compare the HSA product as well, as they may have different features.
Benefit 4: Improved Customer Service
If you are unhappy with the service from your current HSA provider, a rollover or transfer can enable you to switch to a provider with better customer support and resources.
Benefit 5: Aligning with Life Changes
As you move through different phases of life, such as a new job or marriage, you may find that a rollover or transfer helps align your HSA with your current circumstances and goals.
Note: While there are many benefits to HSA rollovers and transfers, it’s essential to weigh these advantages against potential fees, tax implications, and the effort involved in the process.
Conclusion
Health Savings Accounts are powerful tools that allow individuals to save for medical expenses in a tax-efficient manner. With the freedom to change providers through rollovers and transfers, you can ensure that your HSA remains a flexible and adaptive part of your overall financial strategy.
As this guide has illustrated, while the process to rollover or transfer HSA funds is generally straightforward, it comes with its own set of rules and potential pitfalls. Being aware of these is important to successfully manage your HSA.
Remember to act proactively, stay organized, and consult with a tax or financial advisor when navigating these processes. Their expertise can help you make decisions that align with your financial goals and keep the tax-advantaged status of your HSA funds.
Thank you for allowing us to guide you through the complexities of HSA rollovers and transfers. We hope this guide has provided you with the knowledge and confidence to take control of your Health Savings Account and make it work best for you.
The information provided in this guide is intended to be general in nature and is not financial, tax, or legal advice. We have made efforts to ensure the content is accurate as of the publication date, but we make no representations or warranties with respect to the accuracy or completeness of the content. We assume no liability for errors or omissions in the content or for any losses you might sustain from relying on it. Tax laws and regulations are complex and subject to change, which can materially impact your results. Always consult with a qualified tax advisor, financial planner, or attorney before making any financial decisions. This guide is not intended to be a substitute for professional advice.