Tag Archives: Unemployment

What Happens to Your HSA When Your Plan Changes

Your Health Savings Account remains yours no matter what happens in life, but how you use it can vary depending on the event. This post lists the following events related to changing jobs, retirement, and old age and describes what happens to your HSA when they occur.

What happens to your HSA when you switch plans?

With as crazy as the job market and health care is nowadays, there is a good chance that your insurance plan will change in the future. The key is to understand your new insurance and if it is HSA eligible. During sign up or open enrollment, many plans will explicitly say “HSA eligible” as it is a selling point for many. Look for that indicator, but even if is not called out, your plan may still be HSA eligible. To determine this, you only need to confirm that your plan fits within the HSA requirements for 1) minimum deductible and 2) maximum out of pocket limit. If this is true, then your plan is HSA eligible and you can carry on as before.

If your plan is not HSA eligible, you will not be able to make further contributions to it.

  • Health Savings Account – Any previously allocated funds remain yours and can be spent on qualified medical expenses.
  • Contributions – If your plan is HSA eligible, you can contribute the single/family amount for that year. If your new plan is not HSA eligible, you cannot make further contributions for those months you did not have HSA eligible coverage.
  • Distributions – You may spend your existing HSA dollars on any qualified medical expense.

What happens to your HSA when your job changes?

Since your health insurance generally related to your job, changing jobs almost always changes your health insurance plan or provider. As such, this situation has similar implications to the above section and the key is to determine if your new health insurance is HSA eligible or not.

  • Health Savings Account – Any previously allocated funds remain yours and can be spent on qualified medical expenses, even if your new job does not offer HSA eligible health insurance plans.
  • Contributions – If your new job’s plan is HSA eligible, you can contribute the single/family amount for that year. If the new plan is not HSA eligible, you cannot make further contributions for those months you did not have HSA eligible coverage. Remember that you can contribute pro rata for months that you did have HSA eligible insurance. So if you change jobs in July to no HSA coverage, but had HSA eligible insurance from January – June, you can contribute 6/12 or 1/2 of that year’s contribution limit.
  • Distributions – You may spend your existing HSA dollars on any qualified medical expense.

What happens to your HSA when you are terminated/fired?

We have all been there: for whatever reason your job is not working out so you quit or are laid off / fired / let go. This sucks, but you have to be smart and manage your health insurance as you find your next job. The key is to remain covered so that an unexpected health insurance bill does not become your responsibility (e.g. an unexpected appendicitis results in a $25k medical bill).

One option you may be presented is continuing your existing (HSA) coverage under COBRA insurance offered by your previous employer. COBRA coverage functions as a continuation of your coverage, so it will maintain HSA eligibility if your plan is HSA eligible. Thus, you can continue making HSA contributions under COBRA insurance.

If you have to find new insurance, see the first section on switching your plan, as the new plan’s HSA eligibility will determine whether you can continue contribution or not.

  • Health Savings Account – Any previously allocated funds remain yours and can be spent on qualified medical expenses. Note that while you are receiving unemployment benefits, your HSA can be spent on health insurance premiums (see: How to use your HSA when Unemployed).
  • Contributions – While you may not want to make HSA contributions while unemployed, you certainly can if you are covered by HSA eligible insurance. This might be COBRA insurance or coverage you get on your own.
  • Distributions – You may spend your existing HSA dollars on any qualified medical expense, including health insurance premiums while receiving unemployment benefits.

TrackHSA record keeping

What happens to your HSA when you retire?

Congratulations, you’ve made it! Your Health Savings Account will still be with you at retirement, and there is no need to spend it or withdraw it for any reason. In fact, you can continue making contributions as long as you have HSA eligible insurance and are not on Medicare. If you are over age 55, you can also make catch up contributions which are generally an additional $1,000 on top of your normal contribution amount.

If you are over age 65, a special benefit of Health Savings Accounts begins. At this age, you can use HSA funds for anything, not just qualified medical expenses. That’s right, you can make penalty free distributions for any reason. This is how HSA’s can function as a back door retirement vehicle. Before age 65, if you spend your HSA on non qualified medical expenses, you will owe tax (to undo the tax benefit you receive) and penalty. After 65, you will only owe tax on those dollars not spent on medical expenses (no penalty). This functions just like a traditional (pre tax) IRA, just as another vehicle. That said, it might make most sense to keep the HSA for any medical expenses that arise, since that will of course be tax free.

  • Health Savings Account – This remain yours just as before.
  • Contributions – If you have HSA eligible insurance, you can make contributions. You cannot contribute if you are on Medicare.
  • Distributions – Of course, HSA monies can be spent on qualified medical expenses, or if you are over 65, on anything you like (but you must pay tax).

What happens to your HSA when you begin Medicare?

You cannot contribute to your HSA for any month that you are receiving Medicare benefits. However, if you start Medicare in September and had HSA eligible coverage from January – August, you can still contribute 8/12 or 3/4 of your yearly contribution limit. But if your spouse is under 65 you could always contribute to their HSA to continue funding an account.

The good news is that you can use your Health Savings Account to pay for Medicare A, B, D and Medicare HMO premiums. These count as qualified medical expenses so they are tax and penalty free. If you pay for premiums directly through Social Security, you can transfer (pre-tax) money in your HSA to you bank account to reimburse yourself, effectively paying for them with your HSA.

  • Health Savings Account – This remain yours just as before.
  • Contributions – You cannot make contributions if you are receiving Medicare benefits.
  • Distributions – Your HSA can still be spent on qualified medical expenses, and Medicare A, B, D and HMO premiums count as qualified medical expenses. if you are over 65, you can spend your HSA on anything you like, but treated it will be treated as income and taxed.

What happens to your HSA when you die?

It is important to name an account beneficiary for your Health Savings Account. Otherwise, your HSA will be treated as part of your estate and taxed. If you name your spouse as the account beneficiary, the HSA transfers to them ans remains an HSA, offering them all of the benefits of the account. They are not required to maintain HSA eligible insurance and can use the HSA funds for qualified medical expenses, or if they are over 65, for anything they like.

If someone other than your spouse is named as the HSA account beneficiary, your HSA will be closed and the monies will be distributed and taxed to the beneficiary. However, there is a special provision that allows the beneficiary to spend the HSA funds on the deceased’s medical costs, for up to one year after death. That allows them to spend the money tax free and avoid further taxes from the government.

  • Health Savings Account – Passes to beneficiary. If beneficiary is your spouse, remains an HSA. If beneficiary is not your spouse, it is closed and taxed.
  • Contributions – No further contributions. The exception is if the HSA transfers to your spouse, who is also HSA eligible, and can thus contribute.
  • Distributions – If transferred to spouse, the account continues to function as an HSA. If not, your final medical expenses can be paid using the HSA for up to 1 year. The remaining account is liquidated to the beneficiary and taxed.

Contributing to HSA while unemployed on COBRA insurance

This was a reader question submitted by HSAedge reader Helen, send your questions to evan@hsaedge.com

I am unemployed and not receiving unemployment benefits. I am participating in COBRA from my previous employer. Am I allowed to make HSA contributions if my husband is self-employed and does not have health insurance through his company?

You are allowed to make Health Savings Account contributions while using COBRA, assuming the plan you continue is HSA eligible. My take is that COBRA is a program that forces employers to offer the same insurance to past employees, although the pricing isn’t always the same. Thus, if you use COBRA to continue an HSA eligible plan, everything functions as normal, since you are continuing coverage under the same plan. COBRA just guarantees your access to that same plan. Note that employers are not required to continue making any sort of contributions into the HSA.

From the CobraInsurance website FAQ:

When the employee and dependents become eligible for COBRA, they can take this account with them. The employee can still contribute monies to the HSA and keep it for as long as they want. The employer is no longer obligated to contribute money or responsible for administrating the HSA when the employer or dependents are eligible for COBRA.

How to Use Your HSA While Unemployed

If you are reading this, there is a chance that you are unemployed and looking for work. Sorry to hear that, I have been there and it sucks. Keep your head up, make good financial choices and find the next (better) thing.

Health Insurance is confusing enough, but being unemployed adds a layer of complexity to it. Moreover, there are some complications and rules for using your Health Savings Account while unemployed. The following is a guideline for HSA holders if they ever find themselves unemployed and needing to lower their costs and make smart financial decisions:

Stay Insured

Losing a job definitely means a loss of cash flow and it is wise to seriously curb your spending during this period. That said, health insurance is not something you should cut from your budget. It is never worth opening yourself up to the risk of huge medical bills of a hospital visit just because you lost your job. I often state it as such:

A job loss is a temporary setback, but being injured while uninsured can create a long term crisis.

You should, however, consider cutting back on the type of insurance you have. At this point, you just need barebones, good, solid coverage, not a “cadillac” plan that includes low deductibles, low copays, vision, massage and back rubs, etc. You should be looking at the following and finding one that is affordable:

  • Short Term Insurance
    Short term health insurance is temporary insurance designed to fill gaps in coverage. Typically, this insurance lasts for 6 months but may last up to a year. Premiums are much less expensive than comparable plans and are a great option while you look for a job. You can find your term plans at eHealthInsurance.
  • High Deductible / Catastrophic Health Plan
    If you can’t find a short term insurance plan, search for plans that are longer in duration. What you are looking for is low premiums / high deductible – typical of a HDHP. Your goal is to use this insurance as little as possible (using it can be expensive) and to have it in case something catastrophic happens. You can also get quotes for this at eHealthInsurance.
  • Continue your current health plan using COBRA
    Your previous employer might be required to offer you your current health insurance after you leave as a result of the COBRA health care law. Depending on your plan, you might find COBRA very expensive as you are paying the entire premium now. However, definitely compare it against your other options.

Use HSA funds to pay for health insurance premiums while unemployed

If you had the foresight to contribute to your health savings account prior to losing your job, you will be glad you did. One of the HSA’s best benefits is that it allows you to use your HSA to pay for health insurance premiums while you are unemployed. To qualify, you must be receiving federal/state unemployment insurance or paying for COBRA or other continuation coverage. If so, your health insurance premiums while unemployed are qualified medical expenses.

In essence, you could contribute to you HSA for six months, lose your job, and use those contributions to pay for your health insurance for the next six months, all tax free. It is great piece of mind to know that, should you lose your job, your health insurance is financially covered. It is a part of using an HSA as an unemployment safety net.

Cash out any unreimbursed QME you are due

If you have been an astute HSA holder, you have been protecting your HSA and paying for as many medical expenses out of pocket as you can. Doing so allows two things to happen:

  1. You don’t deplete your HSA, so it continues to grow, tax free
  2. You are allowed to reimburse yourself for those expenses at any time in the future from your HSA

This is all part of the using your HSA as an ATM strategy. Now that you are unemployed, it may be time to cash those expenses in and generate some cash flow. While it isn’t ideal to tap your HSA, sometimes the situation calls for it and this is a great source of cash should you need it.

Negotiate any Health Insurance Expenses

While you are unemployed, cash is definitely king and you want to save as much as you can. You have been smart and gotten a high deductible health plan for the short term, but sometimes things happen and you need medical care. If your unexpected expense is below your deductible, you will likely be paying this out of pocket (or HSA) which can sting (these plans only kick in once you hit that deductible).

Don’t be afraid to negotiate your health care costs should they arise. Be straight up with your hospital billing agent and tell them you have a high deductible health plan that this entire expense will be paid out of pocket. Given that they only receive a fraction of what they bill insurance companies, that is amount you are shooting for.

Here is a great link on how to negotiate lower health care prices while you are unemployed. I have personally negotiated and lowered physician/emergency room medical expenses as well as with insurance companies while I was unemployed. Don’t be afraid, you can do it.