As high-deductible health plans and health savings accounts become a more common form of employer-sponsored health insurance, questions begin to arise about what to do with an HSA when an employee switches jobs or changes back to a traditional health plan.
The following is a script that benefits advisors may want to share with the office staff who will be handling these types of calls from employer groups:
Can I ask why you are thinking about closing your account?
As you know, HSAs work differently than regular checking accounts, so there are tax-related consequences associated with withdrawals for non-qualified expenses. We want to make sure you’re aware of the tax rules that apply. Can I ask you a few questions to make sure you have all the relevant information?
Are you changing jobs?If so, you can keep your HSA open and all the funds still belong to you. HSAs are individually owned so they aren't tied to employment status or to any employer. You can still use the funds in your HSA just as you did in the past to pay for medical expenses – and all your withdrawals for qualified expenses will still be tax-free.
Has your insurance plan changed?If so, you can keep your HSA open and all the funds still belong to you. One of the best parts of having an HSA is you can keep your account open and continue to use the funds to pay for medical expenses if your insurance plan changes, or even if you currently don’t have an insurance plan in place.
Even if you no longer have an HDHP, you can still keep your HSA.You can still keep your account open and can continue to use funds for qualified medical expenses – you simply can’t make any additional contributions while you are not covered under a qualified HDHP.
Are you aware that you will be subject to taxes and penalties if you withdraw your funds for anything other than a qualified medical expense?If you withdraw your funds for anything other than a qualified medical expense, you’ll be subject to a 20 percent penalty, plus you’ll have to pay regular income tax on what you withdraw. So for instance, if your account balance is $1,000, and your tax bracket is 30 percent, you’ll be giving up almost $500! That’s money you could otherwise save and use for medical expenses now or in the future.
Keep in mind that as long as you keep your account open and keep the funds in your HSA, they’ll be there for you when you need them to pay for medical expenses. Just by keeping your funds in the tax-advantaged account, you’re automatically saving money on any future medical expenses you might incur.