HSA Portability- Bring your HSA With You!
If you read our blog titled The Long Term Power of the HSA, then you know that we are big proponents of Health Savings Accounts (“HSAs”). By taking advantage of all that HSAs can offer, you can really propel your savings forward and rest in peace knowing you have a plan to tackle your looming healthcare expenses. HSA accounts are growing with increasing popularity. According to Devenir, a leader in HSA solutions, the HSA market will approach $75 billion in HSA assets, covering more than 29 million accounts by the end of 2020. Yet, they are still relatively new, and employees are receiving very little education on HSAs and their benefits. Employers typically distribute HSA information once a year around enrollment time. Most companies don’t proactively and thoroughly educate new hires, nor go the extra mile to inform exiting employees, of their options for their HSA assets. This increases the chance that an employee will forget about an account when leaving.
So what happens to your HSA funds if you leave your employer?
Similar to a 401(k), one of the nice benefits of an HSA is its portability. Your HSA belongs to you and goes with you, regardless of whether you resign, are terminated, or retire. The HSA marketplace has over 300 different HSA providers, and the list is growing. If you change jobs, you have two options. You can roll your funds to a new provider or do a trustee- to- trustee transfer.
With a HSA rollover, you simply contact your HSA provider and tell them you wish to do a rollover to a new provider. You can do a HSA rollover once every 12 months and maintain its tax advantaged status. The HSA custodian will send you a check upon request. Once you have the check, you have 60 calendar days from the date of distribution to deposit this check with a new HSA custodian. If you miss that deadline, or choose not to deposit the check, the funds are considered a taxable distribution and you will pay ordinary income taxes, along with a 20% penalty. If done correctly, you will not pay tax on the rollover and your contribution level will not be reduced that year.
Unlike a rollover, you can do a trustee- to- trustee transfer as often as necessary. You never take possession of the funds. You fill out a trustee -to -trustee transfer form with the HSA provider you would like to use and request that the funds be transferred directly to them. You can even do an in-kind transfer of HSA investments in some cases. This method avoids taxation and does not count toward your annual contribution.
Why is this important?
Many employers pay HSA administrative fees for current employees, but do not continue to do so when employees leave the company. Having multiple HSAs can cost you more in fees, which is detrimental to your overall goal of increasing the balance of your HSA. Additionally, many HSA vendors have minimums before they are able to invest the money. So if you have several small balances at different providers, you aren’t always able to put your money to work and reap the benefit of tax free growth.
All of these small nuances can have a large impact on your total HSA balance when you retire. As with many things, small actions can make a big difference. Since healthcare is anticipated to be one of the largest expenses in retirement, we recommend staying on top of your HSA assets.