Category Archives: HSA mechanics

What Happens to Your HSA When Your Plan Changes

Your Health Savings Account remains yours no matter what happens in life, but how you use it can vary depending on the event. This post lists the following events related to changing jobs, retirement, and old age and describes what happens to your HSA when they occur.

What happens to your HSA when you switch plans?

With as crazy as the job market and health care is nowadays, there is a good chance that your insurance plan will change in the future. The key is to understand your new insurance and if it is HSA eligible. During sign up or open enrollment, many plans will explicitly say “HSA eligible” as it is a selling point for many. Look for that indicator, but even if is not called out, your plan may still be HSA eligible. To determine this, you only need to confirm that your plan fits within the HSA requirements for 1) minimum deductible and 2) maximum out of pocket limit. If this is true, then your plan is HSA eligible and you can carry on as before.

If your plan is not HSA eligible, you will not be able to make further contributions to it.

  • Health Savings Account – Any previously allocated funds remain yours and can be spent on qualified medical expenses.
  • Contributions – If your plan is HSA eligible, you can contribute the single/family amount for that year. If your new plan is not HSA eligible, you cannot make further contributions for those months you did not have HSA eligible coverage.
  • Distributions – You may spend your existing HSA dollars on any qualified medical expense.

What happens to your HSA when your job changes?

Since your health insurance generally related to your job, changing jobs almost always changes your health insurance plan or provider. As such, this situation has similar implications to the above section and the key is to determine if your new health insurance is HSA eligible or not.

  • Health Savings Account – Any previously allocated funds remain yours and can be spent on qualified medical expenses, even if your new job does not offer HSA eligible health insurance plans.
  • Contributions – If your new job’s plan is HSA eligible, you can contribute the single/family amount for that year. If the new plan is not HSA eligible, you cannot make further contributions for those months you did not have HSA eligible coverage. Remember that you can contribute pro rata for months that you did have HSA eligible insurance. So if you change jobs in July to no HSA coverage, but had HSA eligible insurance from January – June, you can contribute 6/12 or 1/2 of that year’s contribution limit.
  • Distributions – You may spend your existing HSA dollars on any qualified medical expense.

What happens to your HSA when you are terminated/fired?

We have all been there: for whatever reason your job is not working out so you quit or are laid off / fired / let go. This sucks, but you have to be smart and manage your health insurance as you find your next job. The key is to remain covered so that an unexpected health insurance bill does not become your responsibility (e.g. an unexpected appendicitis results in a $25k medical bill).

One option you may be presented is continuing your existing (HSA) coverage under COBRA insurance offered by your previous employer. COBRA coverage functions as a continuation of your coverage, so it will maintain HSA eligibility if your plan is HSA eligible. Thus, you can continue making HSA contributions under COBRA insurance.

If you have to find new insurance, see the first section on switching your plan, as the new plan’s HSA eligibility will determine whether you can continue contribution or not.

  • Health Savings Account – Any previously allocated funds remain yours and can be spent on qualified medical expenses. Note that while you are receiving unemployment benefits, your HSA can be spent on health insurance premiums (see: How to use your HSA when Unemployed).
  • Contributions – While you may not want to make HSA contributions while unemployed, you certainly can if you are covered by HSA eligible insurance. This might be COBRA insurance or coverage you get on your own.
  • Distributions – You may spend your existing HSA dollars on any qualified medical expense, including health insurance premiums while receiving unemployment benefits.

TrackHSA record keeping

What happens to your HSA when you retire?

Congratulations, you’ve made it! Your Health Savings Account will still be with you at retirement, and there is no need to spend it or withdraw it for any reason. In fact, you can continue making contributions as long as you have HSA eligible insurance and are not on Medicare. If you are over age 55, you can also make catch up contributions which are generally an additional $1,000 on top of your normal contribution amount.

If you are over age 65, a special benefit of Health Savings Accounts begins. At this age, you can use HSA funds for anything, not just qualified medical expenses. That’s right, you can make penalty free distributions for any reason. This is how HSA’s can function as a back door retirement vehicle. Before age 65, if you spend your HSA on non qualified medical expenses, you will owe tax (to undo the tax benefit you receive) and penalty. After 65, you will only owe tax on those dollars not spent on medical expenses (no penalty). This functions just like a traditional (pre tax) IRA, just as another vehicle. That said, it might make most sense to keep the HSA for any medical expenses that arise, since that will of course be tax free.

  • Health Savings Account – This remain yours just as before.
  • Contributions – If you have HSA eligible insurance, you can make contributions. You cannot contribute if you are on Medicare.
  • Distributions – Of course, HSA monies can be spent on qualified medical expenses, or if you are over 65, on anything you like (but you must pay tax).

What happens to your HSA when you begin Medicare?

You cannot contribute to your HSA for any month that you are receiving Medicare benefits. However, if you start Medicare in September and had HSA eligible coverage from January – August, you can still contribute 8/12 or 3/4 of your yearly contribution limit. But if your spouse is under 65 you could always contribute to their HSA to continue funding an account.

The good news is that you can use your Health Savings Account to pay for Medicare A, B, D and Medicare HMO premiums. These count as qualified medical expenses so they are tax and penalty free. If you pay for premiums directly through Social Security, you can transfer (pre-tax) money in your HSA to you bank account to reimburse yourself, effectively paying for them with your HSA.

  • Health Savings Account – This remain yours just as before.
  • Contributions – You cannot make contributions if you are receiving Medicare benefits.
  • Distributions – Your HSA can still be spent on qualified medical expenses, and Medicare A, B, D and HMO premiums count as qualified medical expenses. if you are over 65, you can spend your HSA on anything you like, but treated it will be treated as income and taxed.

What happens to your HSA when you die?

It is important to name an account beneficiary for your Health Savings Account. Otherwise, your HSA will be treated as part of your estate and taxed. If you name your spouse as the account beneficiary, the HSA transfers to them ans remains an HSA, offering them all of the benefits of the account. They are not required to maintain HSA eligible insurance and can use the HSA funds for qualified medical expenses, or if they are over 65, for anything they like.

If someone other than your spouse is named as the HSA account beneficiary, your HSA will be closed and the monies will be distributed and taxed to the beneficiary. However, there is a special provision that allows the beneficiary to spend the HSA funds on the deceased’s medical costs, for up to one year after death. That allows them to spend the money tax free and avoid further taxes from the government.

  • Health Savings Account – Passes to beneficiary. If beneficiary is your spouse, remains an HSA. If beneficiary is not your spouse, it is closed and taxed.
  • Contributions – No further contributions. The exception is if the HSA transfers to your spouse, who is also HSA eligible, and can thus contribute.
  • Distributions – If transferred to spouse, the account continues to function as an HSA. If not, your final medical expenses can be paid using the HSA for up to 1 year. The remaining account is liquidated to the beneficiary and taxed.

What is HSA tax form 5498-SA?

Form 5498-SA is an informational tax form related to Health Savings Accounts. It is provided by your HSA Trustee (or Custodian) and the IRS requires it be sent to you each year that you make contributions to your HSA. It provides the “official” accounting of your HSA for the year and documents:

  • The HSA trustee
  • The HSA account holder and account number
  • Total contributions made
  • Prior year contributions made
  • HSA rollover contributions made
  • HSA account balance

In essence, it is serves as a year end statement for your HSA (or unrelated to this blog, your MSA or Medicare Advantage) and is used to file HSA tax Form 8889 as well as your personal income taxes.

What should I do with Form 5498-SA?

Form 5498-SA is critically important to filing your taxes. It serves as the source of truth for what was contributed to your HSA for the tax year as well as defining Prior Year Contributions and HSA Rollover contributions. Without referencing Form 5498-SA when you prepare your taxes, you run the risk of incorrectly reporting your HSA contributions for the year. This could lead to missed tax savings or even additional taxes and penalties being assessed later.

You need to reference Form 5498-SA when you complete Form 8889, which is the tax form required for Health Savings Accounts (see article: How to File Form 8889). Box 2 is key as it describes all contributions made to your HSA during the year. You will use this number on Line 2 of Form 8889 to indicate your HSA contributions for the year. However, you will first need to remove any employer contributions to your HSA. If your employer made contributions to your HSA, this can be found on your W-2, and should be subtracted from Box 2 of Form 5498-SA to determine your personal contribution amount. Employer contributions go on Line 9 of Form 8889.

Note that if you made a qualified funding distribution (IRA to HSA transfer), this amount is reflected in Box 2 of Form 5498-SA. That amount will also need to go in Line 10 of Form 8889.

What does Form 5498-SA look like

Form 5498-SA is a fairly simple form but may change from year to year depending on IRS rules and regulations. Here is a blank example for 2016:

HSA_Form_5498-SA_2016

And here is what an example completed Form-5498-SA might look like, which is what you receive:

HSA_Form_5498-SA_2016 completed

In the above example, the HSA holder maxed out their HSA for the year ($3,350). They did this by contributing $3,000 during the year (note: this $3,000 may include employer contributions), and in the following year (before April 15th) made a $350 prior year contribution. They also transferred $100 from another HSA (not counted as a contribution) and their year end balance of their HSA was $10,000.


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Boxes on Form 5498-SA

The left part of Form 5498-SA details account information about the holder and account trustee. Most of this is self explanatory, with the most important piece of information being the “Account Number” which is the identifier assigned by your HSA trustee. In theory, if you had multiple accounts (i.e. HSA and MSA) at the same trustee, you would receive two Form 5498-SA’s and the account number would be shown here.

The right section of Form 5498-SA shows activity related to your HSA in 6 key boxes:

  • Box 1 – Archer MSA contributions. This only includes Archer MSA contributions for the year and and does not apply to HSA’s.
  • Box 2 – Total Contributions. All contributions made to the HSA’s for the year are shown here. This includes qualified HSA Funding Distributions (IRA > HSA transfers) as well as employer contributions.
  • Box 3 – Prior Year Contributions. Shows all contributions made in subsequent year for prior the prior tax year.
  • Box 4 – Rollover contributions. This amount is not included in box 1, 2, or 3. Shown here are rollover contributions from other HSA (or MSA) accounts, so this does not count towards your contribution limit for the year. It is merely transferring HSA dollars to this HSA account.
  • Box 5 – Fair Market Value. The value of your account as of the end of the tax year.
  • Box 6 – Type of account. This shows the type of account being reported on Form 5498-SA, which should be “HSA”.

(Note: this form doubles for MSA’s and Medicare Advantage, but we will only discuss HSA application here).

Who can Contribute to a Health Savings Account?

This is a fairly frequent question from readers who ask, “Who can contribute to an HSA?” or “Who can contribute to my HSA?” These questions take a couple of forms and includes some assumptions, so we will first explain the basics and move to the specifics.

You must have an HSA for anyone to contribute to it

First things first, you must at least open and have a Health Savings Account to be able to contribute to it. Contributing isn’t just some earmark/declaration you make when you file taxes; instead, HSA contributions go to an actual bank account, just like what you might use for checking and savings. This bank account is yours forever and is designated for qualified medical expenses. At retirement age, you can use the account for whatever you like.

You must have HSA eligible insurance in the year to have HSA contributions

A second requirement of contributing to your HSA is that you have HSA eligible health insurance during the year you wish to contribute. This also applies to employer or other contributions (see below) you may receive. You must have a high deductible health plan (HDHP) that meets that year’s HSA requirements to make or receive any contributions. Unfortunately, this prevents you from contributing to an old Health Savings Account if you no longer have qualifying insurance. You have to have coverage at some point during the tax year to make contributions. The key phrase “during the tax year” is important there. This does not mean that you need to currently have coverage to contribute to the HSA. If you had HSA eligible coverage at any point during the year, you can at least make a partial contribution to your HSA.

For example, assume that you had HSA eligible self-only insurance from January – July, and then ended coverage. You made no contributions during that time. You might think that since you made no contributions, you missed out and can contribute nothing to your HSA for the year. This is is not the case. In fact, you are allowed to contribute on a monthly pro-rata basis for the year, in this case 6/12 months or 1/2 of your contribution limit. Health Savings Account contributions and limits are viewed on yearly timeline, and you can even contribute to your HSA in the following year, using what is called a Prior Year Contribution.


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Now onto who can actually make contributions to your Health Savings Account.

1) The account holder (you) can contribute to your HSA

Of course, you can make contributions to your own HSA. This is the most common form of contribution and can take two forms, either a cafeteria plan contribution (pre tax), or a manual contribution (post tax) . While the method and timing differs, both result in the same tax benefits once you file taxes. Cafeteria plan contributions are arranged by your employer and remove your HSA contributions from your paycheck on a pre tax basis. These amounts are deposited into your HSA and you enjoy immediate tax savings. Alternatively, you can make manual contributions to your HSA. This is probably the most common method and involves getting paid, paying taxes, and then depositing or transferring post tax money to your Health Savings Account. At tax time, these deposits are retroactively removed from your taxable income, so you reap the tax deduction benefit at tax time.

Form 8889 line 2 contributions

The method in which you make contributions to your HSA also determines how you file HSA tax Form 8889. The above image shows that manual contributions (post tax) made on line 2, whereas cafeteria contributions (pre tax) are made on line 9 (see next image).

2) Your employer can contribute to your HSA

You can also receive employer contributions to your Health Savings Account. This is a great perk because your employer is in effect giving you free money to use for your healthcare. The schedule and amounts at which they contribute will vary based on your employer. Some employers will provide a small contribution to your HSA’s, whereas others may be very generous and fund your entire HSA. Either way, employer contributions are factored into Form 8889 on Line 9.

Form 8889 line 9 employer contributions

Please note, that per the above discussion, that you must have HSA eligible insurance to receive employer contributions to your HSA. So if your employer offers a great benefit like a HSA contribution, but you choose a non-HSA eligible insurance, you cannot take part in that benefit.

3) Other people can contribute to your HSA

Another benefit of Health Savings Accounts is that anyone can contribute to your HSA. This means that you can contribute to anyone’s HSA, and conversely that your parent, grandparent, rich aunt/uncle, or friend can contribute to your HSA. The best part is that the recipient of the contribution receives the tax deduction for the amount contributed, so that is a second order effect, besides having funds in the HSA.

Form 8889 line 2 other contributions

Note that you must declare contributions from others on your Form 8889 on line 2.

Note: all contributions count toward your contribution limit

Remember that all contributions made to your Health Savings Account count toward your yearly contribution limit. This means that you must take into account employer contributions (and contributions from ‘others’) when you determine how much can be contributed to your HSA for the year.

For example, say you have self-only HSA eligible insurance for all of 2016, affording you a $3,350 maximum contribution limit. If your employer generously contributes $3,000 to your HSA, and your parents chip in an additional $300, you would only be allowed to contribute $50 yourself without incurring excess contributions.