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Plan Well, Retire Well

Saving and investing your money

Transitions: What Happens to My Health Savings Account When I Leave My Job?


When you leave a job, HSAs are simpler in some ways than the FSAs I discussed last month: there is no need to spend down the account while you're employed, or at the end of the year. The money is yours. You decide when to submit expenses for reimbursement, and you can decide which financial custodian you want to use for the account. If you wish, you can roll it over to another HSA provider, much like an IRA.

Note: In some cases, an HSA through your employer may have been bundled together with your health insurance. In that case, losing the insurance could mean you have to move the HSA according to an article in Benefits and Compensation Digest by Whitney R. Johnson.

However, there are some mistakes you could make with an HSA.

What Not To Do

If you've been laid off, the money in your HSA might look like a good way to cover your day to day expenses. But it should be an absolute last resort. For any distribution that is not used for qualified medical expenses, you'll owe income tax and a 20% penalty – on money that could be tax- and penalty-free. Death, disability, and reaching age 65 will get you out of the penalty, but not out of the taxes.

Normally, you can't use money in your HSA to pay health insurance premiums. But if you're receiving unemployment compensation, getting health insurance under COBRA, or paying long term care insurance premiums, you can, with no taxes or penalties on the reimbursement. (IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans).

Keep the Account Open to Preserve Your Options

And there's a reason to keep the account open, even if you have to take out some of the money. Johnson says that the date you opened the account is also the start date for what expenses you can submit for reimbursement. Say you have an HSA and you get laid off. While laid off, you have some major health expenses. Later, you get a new job with a high deductible health plan that allows you to contribute again to an HSA. If you never closed the old account (a rollover is OK), you could fully fund that new HSA and use the money to reimburse yourself for those old expenses. If you took all the money out of the old account and closed it, you could only submit expenses that happened after your new account was opened.

Use Direct Transfer to Move the Account

If you move your HSA, having the money go directly from one account to the other in a direct transfer is the simplest and most problem-free way to do it. If you have a check made out to you, you have to re-deposit the entire amount within 60 days in order for it to qualify as a rollover and avoid it being a taxable distribution, plus the penalty.

Over-Contributing

Over-contributing to an HSA is another way you could run into tax problems. This could happen if you contributed the full annual amount to your HSA and then became ineligible before the end of the year. Perhaps you set up your own HSA account and it wasn't funded through payroll deduction, so you could make the contributions whenever you chose. Then, you took a new job with health insurance that didn't meet the high-deductible requirements, or joined your spouse's plan which wasn't a high deductible health plan either.

You'll need to calculate how much you were eligible to contribute, month by month. If you over-contributed, you may be able to simply withdraw the excess. (See IRS Publication 8889 and instructions for details.) You'll have the pleasure of using the "Line 3 Limitation Chart and Worksheet" on page 4. You have to go through the chart's questions and enter the result for each month separately. I point that out because I thought there was a typo and didn't understand the calculations until I read the instructions more than once.

I was afraid that my husband might run afoul of those rules, because his last day is scheduled to be December 4. If his employer continued payroll deductions for his HSA, could he end up having contributed too much? I was very relieved to discover the "last month rule." It goes like this:

"…you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers)." (IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans).

I think that means that as long as he was eligible for an HSA on December 1, he won't exceed the limits.

Next month, we'll move on to other financial decisions related to leaving a job.

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This post is part of a series about the decisions faced during a job transition, whether you're being laid off, retiring, or moving to another job. The initial post lists some of the topics I'll address, as well as why I'm writing about this issue. You can find other posts in this series by clicking the category Job Loss on the right side of this screen. Or you can subscribe to our monthly e-newsletter, which provides links to all of our new blog posts.

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