What Happens to Your HSA if You're Laid Off

I read your column about what happens to your flexible spending account when you're laid off. I don't have an FSA, but I do have a health savings account. What happens to the money in it if I lose my job?

There's good news for people with health savings accounts: Unlike funds in your flexible spending account, the money in your HSA remains yours even after you lose or leave your job. So you don't need to rush to the eye doctor or dentist to drain the account before your job is terminated.

You can usually keep that money in your former employer's HSA, or you can roll it over to another HSA administrator without having to pay taxes on the move -- a lot like an IRA rollover. But ask first about any transfer fees, says Roy Ramthun, president of HSA Consulting Services, in Silver Spring, Md. The money can then continue to grow in the account and can be used tax-free for future medical expenses in any year -- even if you no longer have a high-deductible health-insurance policy.

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But you must have a high-deductible health-insurance policy to make new contributions -- whether you continue your former employer's plan through COBRA or you purchase your own high-deductible policy after you leave your job. A high-deductible policy is a good option if you've been laid off because it can help keep your premiums low. If you get another job without a high-deductible policy, you won't be eligible to make new contributions to the HSA.

You can make HSA contributions at any time during the year, and you have until April 15, 2010, to make your 2009 HSA contributions (and remove any excess contributions). The money you put into an HSA is tax-deductible and grows tax-free for future medical expenses.

The maximum HSA contribution you can make is generally based on the number of months you had an eligible high-deductible health-insurance policy. The maximum HSA contribution for 2009 is $3,000 if you have self-only coverage or up to $5,950 for family coverage (if you're 55 or older, you can contribute an extra $1,000). But you can contribute only half those amounts if you had an eligible high-deductible policy for just six months. (There are special rules, however, if you have a high-deductible policy on December 1 -- see A Tax Hat Trick for Health Accounts for details).

For more information about HSA eligibility, see Health Savings Account Answers. The U.S. Treasury Department also has HSA information.

HSA money usually can't be used to pay for health-insurance premiums, but there's an exception for people who lose their jobs: You can use the HSA money for health-insurance premiums (whether for COBRA coverage or any other health insurance) if you're receiving unemployment compensation, says Ramthun. That can be a way to pay your premiums with tax-deductible money. (HSA contributions are usually pretax when made through your employer's plan but are tax-deductible when you contribute to the account on your own.)

For more information about health insurance after losing your job, see Stay Covered After a Layoff.