HSA Consolidation and Annual Contributions

Consolidating your existing HSAs into a single account can be a great way to increase the earnings on your savings and avoid unnecessary fees, but not following the correct process can result in IRS penalties. In this article, we will review the reasons to make the move and how to do it the right way.

Why consolidate your Health Savings Accounts

Many people have multiple open health savings accounts, often because they opened a new account when they left one employer and moved to a new one. This left them with one account with the prior administrator and another account with the new administrator. With additional job changes, they may have even more accounts.

If this sounds familiar, consolidating to a single account has some significant advantages:

1. Convenience. Managing just one account is easier – just one online portal, one mobile app, one debit card, one set of tax statements. 

2. Savings. Don’t pay fees on a dormant account when you can take the balance with you! By closing the old account and moving the money to the new account, you avoid the fees on the old account that would eat into the money you saved. Also, many administrators will waive or reduce the fees on the new account once your balance reaches a certain amount. By bringing the money from your old account into your new account, you may avoid fees on the old account and the new account.

3. Earnings. One of the unique benefits of an HSA is that earnings in the account grow tax-free. This makes an HSA a perfect vehicle to grow your savings as much as possible. Earnings in an HSA usually come from interest you receive and returns from your investments. Let’s look at each one:

   • Interest – Many administrators will pay you interest on the money you keep in your cash account. The interest rate you earn is often based on the amount of money you keep in the account, with larger balances earning a higher interest rate. Moving the balance from your old HSA into your new one will increase the balance in your new account, and that may help you earn a higher interest rate.

   • Investments – Depending on your administrator, you may have the option to invest a portion of your HSA balance. In many cases, you have to meet the minimum balance requirement in order to begin investing, often $500-$1,000. Consolidating your HSA balances may help you meet the minimum balance requirement to start investing and/or give you more money to invest. Remember that investing comes with risk, so make sure this is the right strategy for you before you begin investing. Want to see what Associated offers for investments? See our HSA Investment line up. 

4. Service – When you need help, you have a single point of contact to assist with your question or issue. There are times you need an expert, for example, with life changes like getting married, having a baby, adopting a child, changing jobs and/or planning for retirement. Consolidating your accounts means having one team to call or email and making any changes you need just once.

Options for Consolidating Your Accounts

When consolidating your accounts, you will want to choose one of the following two options: trustee-to-trustee transfer or rollover transfer. Here’s how each one works:

Trustee-to-Trustee Transfers

Organizations offering HSAs go by many names—providers, administrators, custodians, trustees, etc. A trustee-to-trustee transfer just means that the bank, credit union, or insurance company that has your old HSA will send the money from that account directly to the bank, credit union, or insurance company that has your new HSA so they can deposit it directly into your new account on your behalf.

To start, you will want to obtain a transfer form from the administrator of your new HSA. Complete the form according to the instructions, then submit it to the administrator of your old account. The form will provide the information they need to close your account and send the funds to the new administrator. The new administrator will deposit the money in your new HSA and note the deposit as a transfer contribution instead of a normal contribution. You don’t need to do anything except watch your new account to confirm you receive the money!

Rollover Transfers

In this method of transferring your account, the administrator of your old account closes your account and sends the money from your account to you. You are then responsible for depositing the funds into your new HSA. You must deposit the funds in the new HSA within 60 days to avoid IRS taxes and penalties.

To do this, you will need to contact the administrator of your old account to learn their process for closing the account and issuing payment. Often, administrators will have a form you need to complete to close the account and direct them to send the payment to you. You will need to watch for this payment because the clock is ticking for you to get the funds into your new HSA or pay the IRS! Once the payment has been received, you will need to deposit the amount in your new HSA. When you make the deposit, you will need to indicate that the amount is a transfer, not a standard contribution.

Choosing the best transfer option

So, what’s the best option for you to use to transfer funds from your old HSA to your new one? From the perspective of the IRS, there is no difference, so you’re free to use whichever works best for you. For example, if your prior administrator only does rollover transfers and won’t accommodate trustee-to-trustee (or vice versa), it’s not a problem. 

While either option will work, many people choose the trustee-to-trustee method for transferring their HSA because it’s fewer steps for them and because they don’t have to worry about the taxes and penalties that could be assessed by the IRS if they don’t deposit the funds into their new HSA within 60 days.

The impact of transfers on annual contribution limits

When completed correctly, a transfer will have no effect on the amount of money you can contribute to your HSA for the year. Completing the transfer correctly means that the deposit is correctly identified as a transfer contribution and not a standard contribution.

Since transfers do not count toward your annual contribution limit, this allows you to still contribute up to the annual maximum based on your enrollment level in the HSA-qualified health plan (individual or family) and whether you qualify to make a catch-up contribution (age 55 and older only).

Be sure when planning for the contributions you will make to your new HSA that you don’t forget any amounts you may have contributed during the year to your old HSA. The IRS limits apply to the year in which you contributed for all accounts combined, not for each account you have or had during the year.

Example:

Joe, age 30, has an HSA through his employer, ABC Company. Between January and June, Joe contributes $1,000 to his HSA bringing his total HSA balance to $5,000. Joe takes a new job starting July 1 with XYZ Company and enrolls in their HSA. Since ABC Company and XYZ Company use different HSA administrators, starting July 1, Joe now has two open HSAs. Joe decides to close the old HSA and move all the money into his new HSA. Here’s what happens:

• A transfer contribution of $5,000 is deposited into his new HSA.

• When Joe is deciding how much to contribute through his new employer, he will need to subtract the $1,000 he contributed to his old HSA from the IRS annual maximum to determine the greatest amount he can contribute to his new HSA.

Maximize the value of your HSA by consolidating today!

As we have shown above, there are significant advantages to consolidating your open HSAs into one account with one administrator, including increased convenience, savings and earnings. Ensuring that your transfer is completed correctly is key to avoiding taxes and penalties from the IRS. Make sure you have an HSA expert on your side!

If you have any questions about HSAs, or if you’re considering opening a new account, please call our Participant Services at 800-270-7719, schedule an appointment online or visit us at any of our Associated Bank locations.

Opening a new HSA doesn’t have to be difficult, and our team is here to help.