Before diving in, we’ll start with the basics of a health savings account, or HSA. A health savings account offers those who have health insurance with high deductibles the chance to save pretax funds to use for medical expenses. If there are any unused funds in the HSA at the end of the year, they roll over to the next year. Unlike with a Flexible Spending Account, an HSA also offers the ability to invest the money, and when the HSA owner hits 65 they can withdrawal money for non-medical purposes without penalty (though it will be subject to income tax, much like a traditional IRA). This mean many HSA owners use it as a backup retirement account.
What Happens at the End of the Year?
A health savings account does not have a “use it or lose it” policy for funds left over at the end of the year. Rather than forfeiting unused funds, your HSA dollars are able to remain in your account, growing tax-free until you are ready to use them.
What Happens if You Change Your Job?
Those who contribute to an HSA are the owners of that HSA account, meaning they can take it with them should they leave their job. If your new employer offers an HSA you like better, then you can choose to roll the money from your old HSA into the new employer’s plan. You can also elect to keep your HSA, so long as you still have your high deductible health plan under the Consolidated Omnibus Budget Reconciliation Act (COBRA), a law that states your right to stay on your current healthcare plan after leaving your job. Your HSA can even be used to help pay COBRA premiums.
If you switch jobs and are no longer covered by a high deductible healthcare plan, you are no longer allowed to make contributions, but you can continue to take money from the plan for qualified medical expenses until the account is depleted.
What Happens if You Die?
Should you die with funds remaining in your HSA, the account will become the property of your designated beneficiary. But your choice of beneficiary can make a big different in how the account is treated.
If your beneficiary is your spouse, then your HSA upon death becomes your spouse’s HSA. He or she can use the money tax-free for healthcare expenses, even if they are not enrolled in a qualifying high deductible health care plan. And just as you would pay a 20% penalty tax if you were to take out money for non-health care related expenses before age 65, so will your spouse. Once your spouse does turn age 65, he or she can withdraw money for any purpose without penalty, the distributions will just be subject to income tax.
When the beneficiary is not your spouse, the rules change. The HSA will end on your date of death, and your chosen beneficiary will receive a distribution and the fair-market value must be included in the beneficiary’s income, therefore becoming subject to income tax. This can pose a problem, as sometimes the large influx of money can cause the non-spouse beneficiary to be bumped into a higher tax bracket. However, should the deceased still have unpaid medical dues within the year of death, the beneficiary can use funds from the HSA towards those expenses, reducing the taxable amount.
Have more questions about your HSA? We can help! Share your experience with our financial advisors at Walsh & Associates by contacting us here or calling our office.
LPL Financial and Walsh & Associates do not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.