How HSA contributions change when you switch HDHPs

In order to contribute to a health savings account (HSA), you need to have coverage under an HSA-qualified health plan. These are known as qualified high-deductible health plans (HDHPs), and they're strictly defined by the IRS — it doesn't just mean any plan with a high deductible.

But one of the benefits of an HSA is the continuity they provide. It doesn't matter where you get your HDHP, and it doesn't have to be the same HDHP from one year to another or even from one month to another. Our family has used the same HSA for more than a decade, even though we've had a few different HDHPs over the years.

So if you're going to be switching from one HDHP to another, rest assured that you'll be able to continue to fund your HSA — and withdraw money as you need it — despite the change in your health coverage. But there are a few things you'll want to keep in mind:

Payroll deductions: Pay attention to the details

If your HSA contributions are payroll deducted and you're switching from one job to another, you'll want to re-run the numbers to ensure that your contributions remain on target for the rest of the year. An example will help to illustrate this:

Different payroll schedules

Let's say you're at Job A for January through June, and then switch to Job B right away on July 1, with health coverage effective from day one. We'll say you've got family HDHP coverage through both employers, and you're planning to contribute $8,300 to your HSA in 2024 (that's the maximum that the IRS allows, unless you're 55 or older, in which case you can contribute an extra $1,000).

But let's say Job A ran on a twice-a-month payroll schedule, whereas Job B pays you every two weeks: That means Job A would have had 24 pay periods during the year, while Job B would have 26. If you structured your HSA contributions at Job A to be $345.83 each pay period, you'd have ended up with $8,299 in contributions by the end of the year — perfectly on track.

But if you tell the payroll folks at Job B to continue your $345.83 HSA contribution every pay period, you're going to end up contributing too much. You will have already contributed $4,149 to your HSA during the six months you worked at Job A. But Job B still has 13 pay periods left in the year, which would result in an HSA contribution of almost $4,495 if you kept your previous contribution schedule.

Once you totaled up your contributions for the year, they'd be about $8,644. The extra $344 would be considered excess contributions, which means you'd have to go through the process of removing that money (plus any earnings) from the account or pay an excise tax on it.

Different employer contribution levels

This sort of scenario — with a potential for excess contributions if you're not paying close attention — could also happen if Job A and Job B have different employer contribution levels for HSAs. The HSA contribution limits apply to total contributions — from you, your employer, or anyone else who contributes on your behalf.

So if your new employer is going to contribute to your HSA, you'll want to take that into consideration when you're determining how much you should be contributing yourself for the rest of the year.

To clarify, the total amount you contributed during the year would likely be spread across two different HSAs, selected by the two employers. But you'd also have the option to transfer the balance in your original HSA to the new one (the IRS allows this anytime, with no limits on how often you do it, as long as you have the funds sent directly from one HSA to another). The IRS will look at your total HSA contributions for the year, regardless of whether they're all in one account, or spread across multiple accounts.

Switching from one self-purchased HDHP to another

If you purchase your own HDHP and switch from one plan to another, nothing needs to change about your HSA at all. People who buy their own health insurance are generally responsible for establishing their own HSA too, since there isn't an employer involved (note that some small employers that don't offer employer-sponsored health insurance do choose to contribute to employees' HSAs if the employees purchase their own HDHPs — if in doubt, check with your employer to make sure you understand all the benefits they offer).

If you switch from one HDHP to another, you don't need to notify your HSA custodian about the change. You can just continue to fund your HSA as usual, since the onus is on you (as opposed to the HSA custodian) to make sure that you remain HSA-eligible.

Switching from one HDHP to another, but with a gap in coverage

What if you switch from one HDHP to another, but with a gap in between the two plans? Maybe you're uninsured for a couple months, or have short-term coverage or a non-HDHP for part of the year? Now how does it work?

Never fear, the IRS has answers for you! As long as you have HDHP coverage as of December, you're allowed to make the full-year HSA contribution, if that's your preference. But if you do that, you then have to remain HSA-eligible throughout the entire following year.

Alternatively, you can opt to prorate your HSA contributions for the year, in which case the IRS doesn't care whether you remain HSA-eligible during the following year. Here's an overview of how the two options work.

So if your first HDHP covers you for January through April, and then you're uninsured for two months, and then you get a new HDHP that covers you from July through December, you have the option to save the full year's contribution limit in your HSA and then maintain HDHP coverage for the whole next year (which allows you to contribute the full amount to your HSA that year too), or you can opt to put 10/12ths of the HSA contribution limit into your account for the year that you had a gap in coverage.

It might seem daunting to make a switch from one HDHP to another, but you can rest knowing your contributions can continue, with no changes in accessing your savings, even if you have to switch plans.

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