“In the hustle and bustle of switching jobs, your Health Savings Account consideration may take a back seat – particularly if you’re no longer eligible to contribute. But fear not – you never lose your balances. Nor are they tied to your employer. “
William G. (Bill) Stuart
Director of Strategy and Compliance
June 24, 2021
The headline from the Los Angeles Times article couldn’t be bolder: “Welcome to the summer of quitting. Why many of us are saying goodbye to our jobs.”
Why the exodus? Many employees have delayed their inevitable departure during the pandemic. Some tasted the freedom of work-from-home and don’t want to return to the office. Others have re-assessed their lives – either at home or perhaps a vacation home in the mountains or at the beach. Still, others are concerned about the safety protocols of their current employer.
Whatever the reason, expect job shuffling to be high during the second half of 2021. If you’re one of the movers and you have a Health Savings Account, there are things that you need to know. They’re summarized below.
It’s Your Account
Unlike a Health FSA or a 401(k) plan, your Health Savings Account isn’t tied to your employer. It’s a financial account that you own in the form of a trust. Sure, you probably set it up through your company, and your employer may deliver a lump-sum contribution or make regular deposits into your account. But it’s your account.
You don’t need to do anything to change ownership of your account when you leave your company. Your Health Savings Account provider may change the terms of your agreement, for example imposing a monthly administrative fee that your employer paid when you remained an active employee. In some extreme cases, your account provider may inform you that you can’t remain a customer if you’re no longer associated with a company with which the provider is a preferred vendor. Don’t worry about that – you’ll know what to do in a moment.
Ownership of Employer Contributions
What happens if your company made an annual lump-sum contribution into your Health Savings Account and then you leave employment during the year? Don’t worry. Contributions vest immediately, unless you were no longer eligible to fund an account or your employer made one of a handful of mistakes.
Front-loading contributions is a risk that companies take. They want to help employees, particularly those new to the program, by providing some money to pay for an expensive medication early in the plan year. But the risk is that if an employee leaves before the end of the plan year, the employer has overcompensated that person.
Trust me, I’ve stress-tested this concept. I received a $1,000 annual contribution in January one year, then left employment during mid-February. My employer couldn’t claw back a prorated portion of the balance of its contribution.
Your New Employer
If your new company offers a Health Savings Account program, you can enroll and, absent any disqualifying event, begin to contribute immediately. Your new employer may have a different contribution policy. It may make deposits per pay period (as my current employer does), give you the full annual contribution, or somehow pro-rate an annual, semi-annual, quarterly, or monthly contribution. Your new company’s Cafeteria Plan amendment will spell out the details.
You’ll almost certainly have to open an account with your new company’s preferred Health Savings Account partner. That’s no big deal. You’ll receive instructions. The company or your new insurer may even send the necessary information electronically directly to the account provider, who then sets up the account and sends you important information.
You’ll obviously need to establish regular pre-tax payroll deductions to fund your account. Your employer can provide directions. When I first enrolled in 2009, this was a manual process that required submitting a paper form with a signature. Today, it’s usually done electronically through the company’s payroll system. Typically, new elections become effective at the next payroll cycle or beginning of the following month.
Be Sure Not to Overlook This Step!
If you want to contribute to your maximum this year, be sure to fire up your calculator to determine the right pre-tax payroll deduction amount. You contributed and may have received an employer deposit through your old company. You may receive a lump-sum or periodic contribution from your new employer. You need to keep track of how much you’ve contributed and how much your new company will deposit to set your payroll deductions.
Most payroll systems and Health Savings Account providers set their systems so that accounts aren’t funded beyond the statutory limit. But that safeguard won’t work for you, since you have two distinct employers and are being paid on two distinct payroll systems this year.
If you contribute too much, you can back out the excess contribution (and any earnings on that amount, which is negligible) before you file your 2021 personal income tax return without penalty. If you contributed less than the maximum, you can make a tax-deductible personal contribution to fill the gap.
Managing Your Old Account
Now, you have two accounts (unless your former and current company use the same provider and that vendor is astute enough to transfer your existing account to your new employer’s pool of accounts rather than creating a new one). What do you do? You have options:
- Keep the old account. This option may make sense if you like the investment options or simply want to have your funds in more than one place. Also, if you’re using your Health Savings Account as a retirement-savings vehicle, you may want to keep the old account and periodically move funds from your new account to the old one to segregate the balances to reduce the temptation to spend the balance when you face a high bill for a qualified expense.
- Move the funds to your new account. A second account isn’t necessary. You can’t increase your contributions or reimburse more family members’ qualified expenses tax-free just because you have more than one account. Many people move the funds from the old Health Savings Account to the new one so that they’re managing only one account (and perhaps avoiding monthly fees on the old account).
Beware that Health Savings Account providers often charge a fee (usually ranging from $18 to $25) to close an account. Here are a couple of tips to avoid that fee:
- Reimburse qualified expenses from the old account until you exhaust the balance. That way, you’re not transferring balances at all.
- Request reimbursement for nearly all your balance in your old account. I did then when my old company switched providers. Rather than paying the $25 closing fee, I withdrew all but $4.00 (the monthly admin fee) from my account via check (which tells you how long ago it was). I left the $4.00 in the account just to make sure the check wouldn’t bounce if the provider extracted the monthly admin fee before my check cleared. Your Health Savings Account probably doesn’t come with a checkbook. But your provider has a means of allowing you to request a reimbursement. By law, neither your account provider nor your employer can require any substantiation with a request for a reimbursement. Be sure to deposit the funds into a new Health Savings Account within 60 days. Otherwise, the balance is subject to taxes and, in most cases, a 20% additional tax as a penalty for a premature withdrawal.
What if You’re No Longer Eligible to Contribute?
Not a problem! You can’t contribute for months that you’re not HSA-eligible. But if you leave your job in June, work for a new company beginning in July, and haven’t contributed to your maximum for 2021, you can make post-tax personal contributions and deduct that amount on your 2021 tax return. For example, if your contribution limit is $3,600 (self-only coverage and under age 55 at the end of 2021), you can contribute no more than $1,800 if you lose your eligibility in June. If you and your former employer contributed only $1,000, you can contribute – and deduct – another $1,800.
Even when you’re no longer eligible to contribute, you can make tax-free withdrawals for qualified expenses for the rest of your life. That means tomorrow, next year, or decades from now. If your new employer offers a Health FSA, you can use your election to reimburse the same expenses tax-free, then cover additional qualified expenses with distributions from your Health Savings Account. Or you can retain your balance until retirement to pay your Medicare premiums, Medicare cost-sharing, and expenses not covered by Medicare (like most dental, vision, and hearing services, plus over-the-counter drugs, equipment, and supplies). Paying for those same services with withdrawals from your tax-deferred 401(k) or Individual Retirement Account will increase your taxable income. But distributions from your Health Savings Account for qualified expenses are always tax- and penalty-free.
The Bottom Line
In the hustle and bustle of switching jobs, your Health Savings Account consideration may take a back seat – particularly if you’re no longer eligible to contribute. But fear not – you never lose your balances. Nor are they tied to your employer. It’s best to act promptly, but you won’t lose anything more than the opportunity to consolidate balances, earn a higher return, or avoid some fees if your provider imposes monthly charges.
What We’re Reading
The economist John Goodman always has an interesting perspective on medical coverage and care. In his latest Forbes column, he proposes an alternative to Affordable Care Act nongroup coverage that is affordable and intents insurers to compete for policy buyers regardless of their health status.
As states begin to reach out to teenagers to receive the COVID-19 vaccine, how do various states’ laws around parental consent come into play? The Kaiser Family Foundation provides a quick snapshot.
The flexibility that Congress and regulatory agencies provided for Health FSAs may inadvertently disqualify certain employees from opening and funding a Health Savings Account. Click here to learn more about what corrective action you can take before the end of 2021.