What Happens to Your HSA After Leaving Your Job

A health savings account (HSA) is an account associated with high-deductible health insurance plans. The funds in an HSA can be used for qualified medical expenses. Employers can contribute to employee HSAs, and the funds in an HSA roll over from year to year. If you have a high-deductible health plan and HSA through your employer, you may wonder what happens to the funds in your HSA when you separate from service.

HSA Portability

• The Internal Revenue Service addresses the regulation of HSAs and other high-deductible health plans in Publication 969. In this publication, it specifies that HSAs are portable, meaning that the funds in your HSA belong to you. You can think of them as being the same as the funds in your 401(k) or 403(b) account. There isn't a vesting schedule associated with HSAs, meaning that 100 percent of the money in the account goes with you.

HSA Fund Uses

• Even if your new employer does not offer a high-deductible health plan, you can still use your HSA for qualified medical expenses. If you leave your job and do not have benefits that start right away, the IRS also permits you to use your HSA account to pay for COBRA coverage. Qualified withdrawals from your HSA are tax-free.

Time Frame

• There is not a time limit for using the funds in your HSA. In fact, you can allow the funds to roll from year to year. If you choose, you can leave the funds in your HSA until you reach age 65. At that time, you can use the funds in your HSA to pay Medicare premiums with tax-free dollars, although an HSA can't be used to pay premiums on Medicare supplement plans. Once you are 65 or older, withdrawals from your HSA that are not used for qualified medical expenses will be counted as income, like a distribution from an IRA. Those non-qualified withdrawals are not subject to the 10 percent excise tax once you reach retirement age.

Ongoing Contributions

• Unless you continue insurance coverage with a high-deductible plan, you cannot make contributions to your HSA. If your employer continues to make contributions in error after you separate from service, the employer cannot recover the erroneous contributions. If you continue to make contributions after your no longer are covered by a high-deductible plan, the Internal Revenue Service will disallow the contributions, and you may be assessed an excise tax on the contributions unless they (and any earnings on those contributions) are withdrawn from the account before you file your tax return.