What Happens to My HSA if Switch Health Plans?
QUESTION: What happens to the HSAs already established if our company intends to switch from a high-deductible health plan (HDHP) to a low-deductible health plan (LDHP) as of January 1, 2011?
ANSWER: As of January 1, 2011, participants of the LDHP will no longer be eligible for HSA contributions. As of that date, each LDHP participant will cease to be an HSA-eligible individual (and may not make HSA contributions or have them made on his or her behalf) because the LDHP is considered a disqualifying non-HDHP health coverage.
When an HSA account holder ceases to be HSA-eligible, it simply means that he/she can no longer make HSA contributions (or to have HSA contributions made on his or her behalf) on a tax-favored basis. In essence, he/she would suspend the HSA deposit activity, temporarily or indefinitely depending upon the facts and circumstances surrounding their insurance status in the future.
Individuals who cease to be HSA-eligible may continue to keep the HSA funds that have accumulated up to the point where they became ineligible. HSA contributions that were made for periods ending before HSA eligibility ends may remain in the HSA, may continue to grow tax-free, and may be withdrawn by the HAS account holder on a tax-free basis to pay for qualified medical expenses or on a taxable basis to pay for non-medical expenses.
If the HDHP participants are currently make HSA contributions via payroll deductions, those payroll deductions will need to be terminated no later than December 31, 2010 to avoid excess HSA contributions and the subsequent tax consequences for these participants for 2011.
QUESTION: What happens if the LDHP participant becomes covered under a HDHP in the future?
ANSWER: For example, if an individual ceases participation in the LDHP before December 1, 2010 and becomes covered under a HSA compatible HDHP by December 1, 2010 the "full-contribution rule" allows HSA-eligible individuals with HDHP coverage on December 1 of a given year to make HSA contributions for that year up to the full statutory maximum annual HSA contribution (including age 55 catch-ups) allowed for their level of HDHP coverage on December 1 and their attained age on December 31. In other words, if the HSA is still open they can resume contributions. Any contributions made under the full-contribution rule are subject to adverse tax consequences if the HSA account holder fails to remain HSA-eligible during a 13-month testing period.