HSA Rules After Leaving a High-Deductible Health Plan
Money Girl explains what happens to money in your Health Savings Account (HSA) when you leave a high-deductible health plan and no longer qualify to make contributions to the account.
Q. I have a high-deductible health plan and use a Health Savings Account (HSA). What would happen to my money in the account if I switch to a plan that doesn’t qualify for an HSA?
A. In a recent Money Girl article and podcast called How to Save Money on Healthcare With an HSA, I discussed the rules and benefits of using a tax-advantaged HSA to pay for medical expenses. In order to qualify for one, you must be enrolled in a high-deductible health plan (HDHP).
So imagine that you’ve built up a nice balance in your HSA, but then change jobs and no longer have the option to purchase a HDHP. Or perhaps your financial or health situation changes and you decide that you’d be better off with a regular, lower-deductible policy instead.
Becoming unqualified for an HSA while you still have money in the account is a common situation—it’s happened to me at least twice in my career. You’ll be glad to know that it doesn’t trigger taxes, penalties, or hurt your finances in any way!
If you leave a HDHP while you have an HSA, you can still spend the funds or use them to reimburse yourself for qualified medical expenses until you empty the account. However, you aren’t allowed to make new contributions to your HSA when you’re not enrolled in a HDHP.
You still get all the advantages of receiving tax-free distributions to spend on qualifying medical expenses. And you can also let the funds roll over from year to year with no penalty if you don’t have medical expenses, just like when you do have a HDHP.
In other words, there’s no downside. All the same rules apply for using existing HSA funds after leaving a HDHP--even if you become uninsured. You just can’t add new deposits to the account.
If you enroll in a HDHP again in the future, you can pick up where you left off and start making contributions to the same HSA again. Or you can open a new HSA if you emptied out and closed the old one.
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