How to Roll Over HSA Funds When Switching Plans

Health Savings Accounts (HSAs) are a powerful tool for managing healthcare expenses, especially in today’s unpredictable economic climate. With rising medical costs and shifting employment landscapes, many Americans find themselves switching health plans—whether due to job changes, retirement, or simply seeking better coverage. If you’re one of them, understanding how to roll over your HSA funds is crucial to avoid penalties and maximize your savings.

Why Rolling Over Your HSA Matters

HSAs offer triple tax advantages: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are untaxed. However, mismanaging your HSA during a plan switch can lead to unexpected fees or lost funds. Here’s what you need to know to keep your savings intact.

The Growing Importance of HSAs

With healthcare inflation outpacing general inflation, HSAs have become a lifeline for millions. A 2023 study revealed that over 35 million Americans now rely on HSAs to cover medical costs. Yet, despite their popularity, many account holders remain unaware of the rules governing rollovers.

Step-by-Step Guide to Rolling Over HSA Funds

1. Understand Your Current HSA Terms

Before making any moves, review your existing HSA’s terms. Some providers charge transfer or closure fees, while others may restrict rollovers. Contact your HSA administrator to clarify:
- Any fees associated with transferring funds
- Processing times for rollovers
- Required paperwork

2. Choose Your Rollover Method

There are two primary ways to move HSA funds:

Direct Trustee-to-Trustee Transfer

This is the simplest method. Your current HSA provider sends the funds directly to your new HSA provider. Since the money never touches your hands, it’s not considered a taxable event.

60-Day Indirect Rollover

If you withdraw funds yourself, you must deposit them into a new HSA within 60 days to avoid taxes and penalties. Be cautious: the IRS allows only one indirect rollover per 12-month period.

3. Open a New HSA (If Needed)

If your new health plan includes an HSA, you may automatically receive a new account. Otherwise, research providers offering:
- Low or no fees
- Robust investment options
- User-friendly platforms

Popular HSA providers like Fidelity or Lively are often recommended for their flexibility.

4. Initiate the Transfer

For trustee-to-trustee transfers:
- Complete your new HSA’s transfer request form
- Submit it to your old provider
- Track the transaction to ensure timely completion

For indirect rollovers:
- Withdraw funds from your old HSA
- Deposit them into the new account within 60 days
- Report the rollover on IRS Form 8889

5. Verify the Transfer

After the rollover, confirm that:
- The correct amount was transferred
- No unexpected fees were deducted
- Your new HSA reflects the balance accurately

Common Pitfalls to Avoid

Missing the 60-Day Window

Failing to complete an indirect rollover within 60 days turns the withdrawal into taxable income, plus a 20% penalty if you’re under 65.

Exceeding the Once-Per-Year Rule

The IRS strictly enforces the one-indirect-rollover-per-year limit. Violating this triggers taxes and penalties.

Overlooking State Tax Rules

While HSAs are federally tax-advantaged, some states (e.g., California, New Jersey) tax HSA contributions or earnings. Research your state’s laws before rolling over.

How Global Trends Affect HSA Strategies

The Remote Work Revolution

As remote work blurs state lines, employees moving across state borders must reassess their HSA compatibility with local laws.

Inflation and Healthcare Costs

With medical expenses soaring, HSAs are increasingly used for long-term savings. Rolling over funds wisely ensures your money keeps pace with rising costs.

Legislative Changes

Proposed laws could expand HSA eligibility or contribution limits. Staying informed helps you adapt your rollover strategy to new opportunities.

Final Tips for a Smooth HSA Transition

• Keep records of all transfer paperwork and confirmations.
• Time your rollover to avoid overlapping fees or lapses in coverage.
• Consult a tax professional if your situation is complex (e.g., international moves or large balances).

By mastering the rollover process, you protect your hard-earned savings and maintain flexibility in an ever-changing healthcare landscape. Whether you’re switching jobs, retiring, or just optimizing your finances, a well-executed HSA rollover ensures your health and wealth stay aligned.