Tag Archives: Qualified Medical Expenses

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.

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.

Reimbursing HSA purchases from prior years

This was an Ask to Answer question submitted on Quora. Send your questions to evan@hsaedge.com

Can I withdraw from my HSA this year for a medical expense paid by cash during the previous financial year?

You can definitely do this, and in fact this can be a recommended strategy.

Your HSA is used to pay for health services and avoid paying tax. However, there are many methods you can use to implement this. The most straightforward is using a debit card linked to your HSA to purchase qualified medical expenses, so that that cost is immediately removed from your HSA. Another option is to pay for health services using a non-HSA method (cash, credit, check) and then reimburse yourself from your HSA. The reimbursement is generally just a bank transfer from HSA > checking account (or wherever) but can occur at any time.

The 2nd option is the one you are using, with a 1 year delay. You made a purchase in the prior year, and are now reimbursing yourself using your HSA. When you file Form 8889 for the reimbursing year, this amount will appear on lines 14 (distributions) and 15 (distributions paying qualified medical expenses), so there is no tax impact. Playing it exactly by the book.

The reason you may want to employ this strategy is it builds up reimbursable “credits” in your HSA account. You have this money as a safety net that you can withdraw at any time, since you already paid for the expense. Moreover, if you are investing your HSA, you are allowing that money to grow tax free.

Can You Cash Out an HSA?

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After saving diligently, using either individual or employer contributions, you may want to take your money out of your Health Savings Account and use it for something different. Before you go to the ATM or HSA website and withdraw all of your HSA funds, take heed: there may be tax consequences to improperly withdrawing money. Let’s discuss the implications and options.

Part of the advantage of an HSA is that the money is triple tax advantaged – you are able to save significantly on taxes by contributing to the HSA. The catch is, this money is required to be used for qualified medical expenses. As such, the government does not look fondly at taking a tax advantage and then not playing by the rules.

Nevertheless, let’s discuss 4 options for removing money from an HSA account:

1) Non Qualified Withdrawal (Penalty Tax)

This is the hard way, just rip the money out and pay the price. From the IRS HSA page:

You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax.

Yes, that 20% tax sure bites, as it was your money to begin with but it is stuck in a “special” government account. That said, this is always an option. When you file your IRS Form 8899, you will have to call out this amount on Line 16 as a taxable distribution. This amount will be added as income on Form 1040 (i.e. you will then pay tax on it), plus Line 17b will assess a 20% penalty that flows over to Form 1040. An expensive option, but at least you can get the funds out of the HSA.

2) Use for Qualified Medical Expenses

This is the right way to remove funds from an HSA account, paying for (or reimbursing) qualified medical expenses. Assume you have a doctor appointment that you pay for out of pocket using a credit card, debit card, or cash. Since this is a qualified medical expense, you are immediately entitled to reimburse yourself for that expense out of your HSA. This is simply a transfer from HSA to other account for the amount of the expense, justified by the receipt. Little by little, you can gradually drain your HSA as you use it to pay for qualified medical expenses. Or, you may want to pull an expense (say, surgery or dental expense) forward so at least you can use those HSA funds. Remember, you can spend HSA funds on other people than just yourself.

Alternatively, you can preempt this situation by building up a nice stack of pending reimbursements. This would involved paying for medical expenses out of pocket and delaying your reimbursement from the HSA. You are then entitled to that reimbursement at any time. Eventually, these reimbursements can add up and you can withdraw a large sum from your HSA. My service TrackHSA.com is a great way to keep a record of these un-reimbursed transactions.

3) Invest your HSA, offset by separate account withdrawal

We know that you can invest your HSA account in stocks, bonds, ETF’s, etc. to let it grow over time. If you need cash, consider other sources first. Instead of raiding your HSA, consider withdrawing funds from a different investment account with no / less penalty. Then, you can invest your HSA to “replace” your prior withdrawal.

For example, assume that I need $2k for some reason. Instead of withdrawing from my HSA and facing a penalty, I could withdraw this from a more liquid account, such as an investment account. I could then offset this by investing my HSA in the same instruments that I just sold, so my investment position is maintained. This could also work if the other account (such as a 401(k)) has a withdrawal penalty but it is smaller (say, 10%) than that of the HSA (20%).

4) Use the funds for anything once you turn 65

Once you turn 65 years of age, your Health Savings Account is liberated substantially. You are free to spend your HSA funds on whatever you want, not just qualified medical expenses. Note that any distribution for non qualified medical expenses will be taxed (just like ordinary income), but at least you are getting the funds out of your HSA. This is fair as well because you never paid tax on the HSA contribution – since you didn’t use it for medical expenses, they make you pay it now. However, you may have gotten the benefit of tax free investment earnings on that money for many years. Either way, this is superior to option 1 above as you do not owe the 20% penalty, just the tax. And that 20% can be a huge number

Note: if you have an HSA, you need to file IRS tax Form 8889 each year you make contributions or withdrawals. Please consider using my automated service EasyForm8889.com to quickly and easily generate your HSA Form 8889. In 10 minutes, it asks you simple questions that correctly populates Form 8889 no matter your situation and delivers you the completed PDF.