Unhappy With Your Employer’s HSA? Here’s How to Move It
If you have an employer-sponsored health savings account (HSA) that isn’t meeting your needs. Move it. In this post we’ll cover all the intricacies of moving funds from an employer-sponsored HSA to a personal HSA. We’ll also touch on the benefits of making HSA contributions via payroll (through your employer).
Let’s go over the benefits of contributing to an employer sponsored HSA via payroll.
Tax Avoidance - If your employer offers an HSA through a Section 125 Cafeteria Plan, your contributions will avoid FICA (Social Security and Medicare) taxes of 7.65%—a big benefit. For many taxpayers, the difference is more than $7 savings for each $100 contributed to an HSA through payroll compared to the same amount contributed on their own. For a family that contributes the 2019 maximum of $7,000, that translates into more than $500 in savings by making contributions through their employer’s payroll.
Convenience - It’s nice to have funds placed in an HSA without any effort. You simply specify the amount of money you want to contribute from your paycheck. A handful of HSA providers also partner directly with health insurance plans and employers to offer complete integrated enrollment and claims payment solutions, which improves the experience for HSA owners by simplifying the account setup and eliminating the hassle of keeping track of medical claims and receipts.
Covered Fees - HSA providers sometimes charge monthly account maintenance fees. But it should be noted that if you participate in an HSA through your employer, they'll often take care of these fees for you. Your enrollment paperwork should detail this, but if you're unclear, check with your plan administrator.
Employer Contributions - Employer’s may match contributions dollar for dollar, up to a certain dollar amount. This is free money. Can’t pass that up.
That said, once funds are deposited into your employer-sponsored HSA via payroll, you are free to move them to the administrator of your liking. In addition to your employer-sponsored HSA, you can open up a personal HSA. You can have multiple HSAs at the same time. Remember you have complete control over where your HSA funds are located.
You have three options when it comes to funding a personal HSA.
Transfer funds from employer-sponsored HSA to personal HSA
With this strategy, you deposit funds into your employer-sponsored HSA via payroll. After the deposit is made, you initiate the transfer of funds from your employer-sponsored HSA to your personal HSA. A few things to consider before initiating a transfer.
Transfers may incur fees. Before going this route, find out what fees are associated with the transfer process. Typically, administrators only charge for funds being transferred out. Transfer fees range from $0 - $25. Tip: Ask the receiving HSA administrator to pay for the transfer fee.
You can make an unlimited number of transfers.
You don’t have to report transfers on your tax return. Unlike a rollover, you don’t receive any 1099 forms for transfers.
It takes anywhere from 2-6 weeks for transfers to go through.
If your employer-sponsored HSA allows free fund transfers, this is the best way to fund your personal HSA.
Rollover funds from employer-sponsored HSA to personal HSA
With a rollover you are moving the funds from one HSA to another, but the funds are sent to the account holder rather than directly from one trustee to another. You have 60 days to get the funds back into an HSA without incurring taxes or penalties. In order to initiate the rollover process, first log into your personal HSA, then find the rollover form. When you send the rollover form to your personal HSA, be sure to indicate the money is a rollover, not a normal contribution. That way it doesn’t use up the annual limit for your normal contributions.
You can request a distribution from your employer-sponsored HSA as you normally would when you reimburse yourself for eligible medical expenses. The distribution is deposited into a personal checking account. Then you send a check within 60 days to the new HSA provider as a rollover contribution. If you have checks from your employer-sponsored HSA, you can write a check for the amount you want to rollover and send it with your rollover form to your personal HSA. If you don't have checks from your employer-sponsored HSA account, you can write a personal check. There are a few restrictions with HSA rollovers.
The IRS limits one rollover per 12 months. You can only do it once per rolling one-year period (not calendar year).
You have to file Form 8889 during taxes to report that you performed an HSA rollover.
From the day you initiate a rollover, the funds must be deposited into the account within 60 days.
In spite of the restrictions, if your employer’s HSA charges for transfers or is stupendously cumbersome, you may be limited to doing an annual rollover.
Make contributions directly to your personal HSA
As mentioned earlier, if you make HSA contributions directly through payroll, you likely won’t be paying FICA taxes on those contributions. However, if you choose not to use your employer’s HSA provider and make contributions outside of payroll, those contributions would be subject to FICA. This is why making direct contributions to a personal HSA is the least preferable method.
Can you set up payroll deductions for a non-employer HSA?
It’s definitely possible if you, your employer, and a nimble custodian are willing to make this happen. You’d first need to open up an HSA with an administrator of your liking. Once you’ve set up an account, supply your account & routing number to your employer, and they’ll set a payroll HSA deduction so you can make contributions on a pre-tax basis. The downside to this set-up is that the employer probably won’t pay the maintenance fees, but this wouldn’t be an issue if you opted for a fee-free administrator.