Dump HSA funds and start over

[ENT Doc]

“On a separate note, what happens if you switch to a non-eligible, non-high deductible health plan in the future. Obviously you can’t keep contributing to the HSA during those years.”

Correct. But be careful with contributions and when you are no longer eligible. If you contribute under the last month rule (see Pub 969 I believe) and you switch the next year your previous contributions under that rule will be deemed ineligible.

“Presumably you can keep the HSA open and investing?”

Yes.

“Can you still withdraw the funds tax free for health care expenses, even if you now have a more traditional health plan that is not HSA eligible?“

Yes. You can pay for old qualifying expenses, as long as they occurred after you funded the HSA. Or new qualifying expenses.

[CFEonline]

GasFIRE wrote:

I asked a similar question last month: https://www.whitecoatinvestor.com/forums/topic/future-hsa-disbursement-question/ @spiritrider clarifies the issue, but essentially once the HSA is established, you can continue to use it to invest and pay for any qualified expenses for you/spouse/dependents in the future.

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Thanks that has a lot of helpful detail.

[CFEonline]

ENT Doc wrote:

Correct. But be careful with contributions and when you are no longer eligible. If you contribute under the last month rule (see Pub 969 I believe) and you switch the next year your previous contributions under that rule will be deemed ineligible.

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That is good to know and particularly salient for those transitioning jobs mid year or leaving residency. I looked up the wording in Pub 969 and am pasting it below for reference

Last-month rule. Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month, if you didn’t otherwise have coverage.

Testing period. If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2018, through December 31, 2019).

If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the total contributions made to your HSA that wouldn’t have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are calculated on Form 8889, Part III.

 

The way I read this is, if one elects HSA-eligible HDHP coverage on or before Dec 1 2019, and keep it through Dec 2020, you can contribute the full amount for 2019 ($7000) and then also the full amount for 2020 ($7100).

[Lithium]

 

Lithium wrote:

The wrap fee I calculated

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What is the wrap fee at Health Equity you are referencing?

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Unless it has changed or gone away, they charge a minimum of 0.4% a year to invest in all the low-cost mutual funds, assessed monthly (0.033%)

[spiritrider]

You are correct.

[spiritrider]

CFEonline wrote:

The way I read this is, if one elects HSA-eligible HDHP coverage on or before Dec 1 2019, and keep it through Dec 2020, you can contribute the full amount for 2019 ($7000) and then also the full amount for 2020 ($7100).

You are correct.