Funding Your HSA – Contributions, Transfers and Rollovers

Ideas for funding your HSA

If you have a high deductible health plan (HDHP), you may also have an HSA account. HSAs come with a variety of funding options, but check the fine print first. Read on to learn and understand more about these beneficial consumer directed healthcare accounts and the various ways in which they can be funded.

Owning a Health Savings Account (HSA) comes with many benefits. HSA owners make tax-free contributions, earn tax-free interest and investment income, and can use the money tax-free to pay for qualified expenses for themselves and their dependents.  And unlike a Flexible Spending Account (FSA), HSA participants own the account, and the account goes with them if they leave their employer.

When it comes to account funding, HSA owners have several options available beyond traditional payday contributions. Here are a couple of alternative ways to fund this tax-advantaged account, including funds transfers from certain other accounts.

Options for Funding Your HSA

Cash is King!

Cash contributions can be made to an HSA by anyone on your behalfHow does that affect your taxes?

  • You can contribute with a payroll deduction through a salary reduction arrangement, reducing your taxable income. But your employer has to have a Section 125 cafeteria plan in place.
  • If your employer contributes to your HSA, their contributions are not subject to income or payroll taxes as they are not considered income.

HSA-to-HSA Rollover

If you leave one employer where you had an HSA for another employer who offers an HSA, you may want to do a rollover. In this case, the former provider transfers the balance in the old HSA to you, then you send it to the new provider for deposit into your new account. Here’s where you need to read the fine print:

  • You can only do this once every 12 months.
  • You have to complete the transfer within 60 days or the transfer will be reclassified as an ineligible distribution, meaning you will pay income tax on it and be penalized 20% as well.

There are pros and cons for this type of transaction. The pros are that you can consolidate accounts for more efficient management, and the consolidation may lower your fees and investment costs. The cons are that you probably won’t have access to the funds during the transfer process, and changing accounts always takes time and effort.

Trustee-to-Trustee HSA Transfer

You can request that a former HSA provider transfer the balance to a new provider, without any involvement from you. This trustee-to-trustee HSA transfer doesn’t create a taxable event, and you can use this method to consolidate multiple accounts in the same calendar year.

In-Kind HSA Transfer

If you own an HSA account with funds that are invested, you may be eligible for an in-kind transfer. That allows you to move your investments to a new provider. If you aren’t eligible for an in-kind transfer, you’ll have to convert the investments to cash and then pursue a trustee-to-trustee transfer instead.

IRA-to-HSA Rollover

If you have consolidated your HSA accounts but are still looking for ways to increase your HSA balance, you have one more option – but be aware that this is a one-time option. You can transfer the current yearly limit from your IRA to your HSA. This is a great option for those who want to build their HSA balance without having to use cash out-of-pocket. If you do an IRA-to-HSA rollover, you have to stay enrolled in an qualifying HDHP for 12 months after the transfer is completed. If not, you’ll be subject to taxes and a penalty.

Accounts You Cannot Use to Fund Your HSA 

You cannot transfer money from a 401(k), 457 or other type of retirement plan, but you may still have another option. If you have a 401(k) from a former employer, you may be able to roll those funds into a traditional IRA and then make the one-time transfer from the IRA to your HSA. You can also transfer funds from a SEP (self-employed plan) or Simple IRA if the plan is no longer ongoing.

There are a number of options when it comes to funding your HSA. If you are considering a transfer or rollover, talk to your HSA and retirement account administrators before you start the process. They can help you avoid mistakes that could be costly. Finally, read and consider the information presented in IRS Publication 969. It can help educate you and guide your decision-making regarding an HSA transfer or rollover.

DataPath Summit features all-in-one HSA administration, with HSA management, custodial banking, and investments in a single solution.

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