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Tuesday, March 5, 2013

HSA rollover to 401kIn the last few months we've received several inquiries about the legality of rolling a health savings account into a 401(k). This is something you could theoretically do, although there really isn't much of a purpose to doing so, and calling it a "rollover" is a bit of a stretch. It's more like an unqualified distribution than anything else. Depending on your age, you'll be subjected to a 20% penalty and the money would be considered taxable income for the year in which you made the "rollover". There are a few “ins and outs” to some of the different situations with this one and it can be a little tricky, so we wanted to address the issue in writing to help anyone else who may be looking for any information on this topic.

First things first, we combed through our collection of HSA legislation to see if we could find anything that would either confirm or deny that you could roll HSA funds to a 401(k). Unfortunately there is nothing that specifically mentions the 401(k) in either a positive or negative aspect. In order to get an official definitive answer we went ahead and contacted the US Treasury Department. We explained the situation and told them we wanted to be sure there was no specific provision allowing a penalty-free transfer or rollover from a health savings account to a 401(k), similar to the provision that allows a one-time transfer from your IRA to your HSA

HSA Rollover Rules There isn’t one. They informed us that they simply don’t create a running list of things you can’t do or things that aren’t allowed, as it’s much easier to create and manage a list of things you can do (as that’s a much shorter list). Rolling your HSA funds at any time into a 401(k) is not on the list of things you can do. Furthermore, the only time you can roll your HSA funds anywhere is to another HSA.

That is pretty cut and dry, but some people may still suggest you can move money from your HSA to a 401(k), which is true. However, the terminology is where some people may be getting a little lost or confused with this. If you really wanted to, you could “roll” your HSA to a 401(k), but there really isn’t any benefit to doing it. As we stated earlier, prior to age 65 this “rollover” is really nothing more than an unqualified distribution from your health savings account.   It’s unqualified because it isn’t sheltered by a rollover provision, and it isn’t a qualified HSA medical expense. Prior to age 65, you’ll pay a 20% penalty on the funds transferred, and that money will also be considered taxable income in the year you made the transfer. 
 
After age 65, you won’t pay the 20% penalty (as the penalty for non-qualified HSA distributions disappears at age 65), but the money will still be considered taxable income. Furthermore, because the distributions out of a 401(k) are also taxed, you’re actually doing yourself a disservice by transferring out of the HSA into a 401(k) for a couple reasons. First, you’re effectively “double-taxing” yourself. The money’s tax-free going into both accounts, but is also taxed coming out of both. You’ll be taxed on the HSA distribution, and then again on the 401(k) distribution, whenever that occurs. Second, you can still use your HSA funds tax-free for any qualified medical expenses, including Medicare premiums. You’d be much further ahead to leave the money in the HSA and spend it on those qualified purchases, effectively dodging the taxes being charged on those funds at all, let alone twice.
 
So once and for all, can you roll your HSA into a 401(k)? Technically, no. You can’t roll an HSA anywhere, except into another HSA. You can move money from an HSA to a 401(k), but you’re going to incur a potential litany of taxes and fees doing it, while simultaneously losing the luxury of paying for any qualified medical expenses tax-free with the HSA funds.

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Posted by HSA Admin at 3/5/2013 4:40:00 PM
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