What Happens to My HSA When I Leave My Job?

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Unlike a Flexible Spending Account, you can keep your Health Savings Account (HSA) when you leave your job. Even if you opened your HSA in association with a high deductible health plan (HDHP) you got from your job, the HSA itself is yours to keep. All of the money in it—including contributions your employer made, contributions you made, and interest or investment growth—belongs to you.

Happy employee leaving the office after quitting his job
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Pay COBRA Premiums Using Your Health Savings Account

If you’re losing your health insurance as a result of leaving your job, you can use the money in your HSA to pay the monthly premiums for COBRA continuation of your health insurance. This is considered a qualified medical expense, so you won’t have to pay income taxes on the withdrawals, and you won't be subject to the 20% penalty that applies to HSA withdrawals that aren't used for qualified medical expenses.

What if you can’t afford COBRA, don’t want to continue your current health plan, or aren’t eligible for COBRA? As long as you’re receiving federal or state unemployment benefits, you may withdraw the money in your HSA to pay health insurance premiums. For example, you could purchase a health plan from your state’s Affordable Care Act health insurance exchange and use money from your HSA to pay the premiums. Depending on your income, you may even be eligible for a government subsidy to help you pay the monthly premiums so your HSA funds stretch further. But once you're no longer receiving unemployment benefits, you cannot use pre-tax HSA funds to pay your health insurance premiums (unless you're transitioning to Medicare; HSA funds can be used to pay most Medicare-related premiums).

Note that the American Rescue Plan has made it easier for people to maintain health insurance coverage if they're using COBRA or receiving unemployment compensation in 2021. Through September 2021, COBRA is premium-free (entirely funded by a government subsidy) for anyone who involuntarily lost their job or had their hours reduced and thus lost their employer-sponsored health insurance. And anyone receiving unemployment compensation in 2021 is eligible for a premium-free Silver plan in their state's health insurance exchange, with full cost-sharing reductions.

These benefits make it less likely that a person will need to tap into their HSA to pay health insurance premiums in 2021, although that benefit is still available if needed. For example, a person would still be able to use their HSA to pay COBRA premiums even if they aren't eligible for the COBRA subsidy because they voluntarily left their job. And a person receiving unemployment compensation would be able to use their HSA money to pay the additional premiums necessary if they wish to purchase a plan that's more expensive than the premium-free benchmark plan that's available to them (note that the premium-free benchmark plan is available throughout 2021—unless the person becomes eligible for Medicare or another employer-sponsored plan—but the ability to use HSA funds to pay health insurance premiums only lasts until the person stops receiving unemployment compensation).

As soon as you stop receiving unemployment benefits, don't forget to stop using your HSA funds to pay those health insurance premiums.

Use Your HSA as an Emergency Fund

The money in your HSA can be withdrawn to pay for medical expenses. But you don't have to withdraw money from your HSA when you have a medical expense. Instead, you can pay your medical bills with other money (post-tax) and keep the receipt. Then, months or years or decades later, you can withdraw money from your HSA to reimburse yourself for the medical expense that you paid with post-tax money (this is assuming you didn't itemize those medical expenses on your tax return the year you paid them; you can't ever double-dip on your taxes, so if you itemize the deduction, you can't also reimburse yourself with pre-tax HSA money).

So some people treat their HSA as an emergency fund, invested in stocks or bonds or an interest-bearing account, with the gains growing tax-free from one year to the next. They pay all their medical bills with other funds and save the receipts. Then if they need the money—because of a job loss, for example—they can withdraw as much from the HSA as they've spent on otherwise unreimbursed medical bills during the time they've had the HSA. The withdrawal isn't taxed since it's technically being used to pay for medical expenses, just many months or years after the fact.

Losing Your High Deductible Health Plan? Stop Your HSA Contributions

If you lose your high deductible health plan (HDHP) health insurance coverage, you won’t be able to contribute to your HSA until you regain HDHP coverage. This is true even if you get health insurance coverage from a different type of health plan. Not having an HDHP means you’re not allowed to contribute to your HSA (and keep in mind that an HDHP is a very specific type of health plan that has to follow specific IRS rules; it's not just any health plan with a high deductible).

However, you may withdraw tax-free, penalty-free funds from your HSA to pay for qualified medical expenses whether you have an HDHP, a different type of health insurance, or are uninsured.

So if you get an HDHP from your new employer, or purchase an HDHP on your own (through the exchange in your state or off-exchange), you can continue to make contributions to your HSA.

If you switch to a different type of health insurance or end up uninsured altogether for a while, you can't contribute anything to the HSA during the time that you don't have HDHP coverage.

If you end up getting HDHP coverage again before the end of the year, and you have HDHP coverage as of December 1, you can contribute the full allowable amount to your HSA for that year.

But there's a caveat: You then have to keep your HDHP coverage in place throughout the next year (this is called the ​testing period) or else you'll have to pay taxes and a penalty on some of the HSA contributions you made during the year when you didn't have HDHP coverage for the whole year. 

[The maximum allowable HSA contribution amount in 2021 is $3,600 if you have coverage for just yourself under the HDHP, or $7,200 if you have coverage for yourself and at least one other family member under the HDHP. And you always have until the tax filing deadline—around April 15 of the following year—to make some or all of your contribution (for 2019 and 2020 HSA contributions, the deadlines were extended in line with the tax filing extensions that applied due to the COVID pandemic).

Retiring? Special Rules Apply to Your Health Savings Account

Once you turn 65, you may withdraw money from your HSA for any reason without facing the 20% penalty for non-medical withdrawals. However, only the money you withdraw for qualified medical expenses will be tax-free. You’ll pay regular income taxes on money you withdraw for non-medical purposes.

Medicare premiums (for Part B, Part D, Medicare Advantage, and Part A for people who don't receive it premium-free) are considered a qualified medical expense, but Medicare supplemental policies (Medigap plans) are not. You’ll pay income taxes on HSA withdrawals used for Medigap premiums, but the HSA withdrawals you use for other Medicare premiums will be tax-free.

Note that while you can generally always use your HSA funds to cover medical expenses for your spouse, the rules are a little different for Medicare premiums: You can only use your pre-tax HSA funds to cover your spouse's Medicare premiums if you and your spouse are at least 65 years old. If you're not yet 65, you won't be able to cover your spouse's Medicare premiums with your HSA funds until you turn 65 (HSAs are individually owned, even if the plan is linked to a family HDHP; each spouse can have their own HSA if they're eligible, or they can both contribute to one that's in just one spouse's name).

You may no longer make contributions to your HSA once you’ve enrolled in Medicare. This is true even if you're only enrolling in Medicare Part A, and are delaying Medicare Part B because you're still working and enrolled in your employer's health plan. You'll need to stop your HSA contributions as soon as you're enrolled in any Medicare coverage. Some people choose to delay even premium-free Medicare Part A if they're still working, not yet receiving Social Security benefits, enrolled in their employer's HDHP, and making HSA contributions.

Want to Change HSA Custodians?

An HSA custodian is the bank or financial institution where you keep your HSA funds. You don’t have to keep your HSA with the same custodian after you leave your job; you may move your HSA from one custodian to another. You might consider doing this if

  • You’re unhappy with the fees your current HSA custodian charges.
  • You’re not satisfied with the investment options your current HSA custodian allows.
  • Your current custodian offers online-only HSA management and you’d prefer getting face-to-face customer service by walking into your local bank or credit union.

Changing from one HSA custodian to another can be done by a direct transfer of assets between custodians. In other words, your old HSA custodian transfers the money directly to your new HSA custodian. Following the rules in IRS Publication 969, “Do not include the amount transferred as income, deduct it as a contribution, or include it as a distribution on Form 8889.”

Some custodians charge a fee for transferring assets or closing an account, so make sure you ask.

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Article Sources
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  1. Internal Revenue Service. Notice 2004-2. This notice provides guidance on Health Savings Accounts. 

  2. Internal Revenue Service. Publication 969 (2018), Health Savings Accounts and Other Tax-Favored Health Plans.

  3. Internal Revenue Service. Revenue Procedure 2020-32.

  4. Benefit Strategies. HSAs and Medicare.