What do you do with your old HSA?

This is a common question I hear after someone has changed employers: what do I do with my old HSA. I figured perhaps some of you might have the same exact question. 

First of all, what is an HSA? It stands for Health Savings Account, and it’s a tax-advantaged savings account that allows you to set aside pre-tax money to pay for qualified medical expenses. This include large expenses as laser eye surgery or cardiac treatment; as well as small expenses such as tampons, itch cream, sunscreen, and bandages. Lively has an awesome database of eligible expenses in case you need to look this up.

However, not everyone qualifies for an HSA. You must have what’s called a high-deductible health plan (HDHP) in order to enroll in an HSA. Having an HDHP might mean that you have a low monthly premium, but to make up for that low cost, you might have a high deductible for times when you use your health insurance to cover medical costs. 

For the 2024 calendar year, your qualifying HDHP must have an annual deductible of at least $1,600 for self-only coverage and $3,200 for family coverage. So, imagine breaking your arm and the estimate for medical costs all together would amount to $3,500. In order for your HDHP to kick in, you’re on the hook for that first $1,600 (i.e., the deductible), for which you can use the funds from your HSA. Your HDHP will cover the remaining balance of $1,900.

To me, opening an HSA — if you qualify, of course — is a no-brainer. It’s considered a triple tax advantage:

1. Contributions up to $4,150 (for individual) or $8,300 (for family) are tax deductible.
2. Investments grow tax-free.
3. If funds are used for qualified medical expenses, they’re tax-free.

So, if you qualify, I would highly consider enrolling. It will save you many hundreds, if not thousands, of dollars in medical expenses and will grow with compound interest if you are able to select its investments. (I won’t go into the investment piece here since that opens a whole other can of worms, but here’s a cute NerdWallet article that might pique your interest.)

(Quick Soap Box: I wish we could all enroll in an HSA! Medical care is already so expensive as it is, so we should all have this privilege until medical care actually becomes affordable… Anyways… Back to my post…)

What can you do with an HSA from your previous employer?

HSAs are yet another complicated financial vehicle, so the answer to this question has many other sub-questions that I’ll do my best to cover:

Can I still use the funds from my old HSA? Definitely, yes! HSAs were designed to cover medical expenses, so use it to support your health. Lively has a useful database that lists all qualified medical expenses.

Can I use the funds for other things? Technically, yes. But if you use it for non-medical expenses, you are on the hook to pay penalties: income tax plus an additional 20% tax. The exception is for individuals with disabilities or for individuals aged 65 or older.

Can I withdraw the cash? Technically, the answer is yes but I wouldn’t recommend it. If you withdraw the cash, you’d have to pay income tax, since the funds you deposited were pre-tax.

Can I invest my HSA funds? When you turn 65, your HSA works like a traditional IRA account. This means you can use it for retirement.

Can I continue contributing to my old HSA? You can continue contributing only if you qualify for an HSA in your current situation. In other words, you must again be enrolled in an HDHP (high-deductible health plan) or enrolled through COBRA; vice versa, if you are no longer enrolled in an HDHP, you can no longer contribute your HSA. 

If you do qualify and continue to contribute to your old HSA, you’ll be contributing post-tax dollars, rather than pre-tax dollars. So, just be sure to report your contributions in next season’s tax filings, since these contributions are tax-deductible.

Last thing about this: if you keep your HSA with your previous provider, be mindful of the fees you are now on the hook for. Your previous employer would have covered those fees, so it might worth considering the answer to the next question…

Can I roll over my old HSA into my current HSA? Yes! This could potentially save you on maintenance or administrative fees. You’ll either be issued a check to then deposit into your new HSA account, or it’ll happen electronically. Consult with both your old and new HSA providers to get the ball rolling.

What happens to my old HSA if I do absolutely nothing with it? Unfortunately, inactivity is cause for the provider to send it to your state as abandoned property. As the adage goes, if you don’t use it, you lose it. Even though funds from your HSA roll over year to year, inactivity trumps this. Several websites, like unclaimed.org, allow you to check by state to see if there are registered funds in your name. (Source)

Having an HSA is super useful, when you qualify for it. If you no longer qualify but still have funds in your old HSA, be mindful of how you use it. It has enough restrictions and penalties if used incorrectly that aren’t worth testing, in my opinion. So, keep it simple: use the funds for qualified medical expenses.