What to do with my HSA before a job change before year end

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PikaPika
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What to do with my HSA before a job change before year end

Post by PikaPika »

So I most likely will be changing jobs within the next month or two. I currently have an HDHP+HSA with my current employer that both my and my spouse are under. I do not currently make maximum contributions to the HSA as I am still balancing on maxing out my 401k and some other expenses. My new job will not have an HSA. So I was wondering that would it be a good idea to before my final paycheck max out what I am able to put into the HSA for the year (most likely 10/12 of the max limit). My thoughts there are that since our medical expenses are so low and our coverage will be much better I will be able to leave the HSA as is until I need it in retirement and maxing out it's contributions will help to boost it up a little bit more with no downside. Not to mention being able to earn some extra income from the HSA's investments since it is over the minimum limits needed for that.

I will also have to sort out yet another 401k but that isn't as unfamiliar territory as the HSA.
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mhc
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Re: What to do with my HSA before a job change before year end

Post by mhc »

Welcome to the forum.

Getting as much money into the HSA as you can makes sense.

Once you change jobs, I would look into transferring the HSA to Fidelity. Fidelity has a no fee HSA with great low cost investment choices. You can invest every dollar.
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PikaPika
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Re: What to do with my HSA before a job change before year end

Post by PikaPika »

Thanks! Lurked for a while and it was time to register, heh.

So that certainly makes sense to me as well. HSA is currently through optum which I dont think has much in the way of fees but I will have to check their investment side. Moving to Fidelity would certainly be simple as I have an account there already and since I won't be touching it for some time maximizing that investment is good.

Also am I correct in my calculations that the maximum I can contribute is equal to the number of full months I have a qualifying HDHP?
And by extension when I searched initially on the forums it was mentioned that contributions to an HSA had to be done via paycheck withholdings directly and if I add money outside of that I may end up paying a small penalty or tax on it. Is this still the case?
lstone19
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Re: What to do with my HSA before a job change before year end

Post by lstone19 »

PikaPika wrote: Thu Sep 16, 2021 3:10 pm And by extension when I searched initially on the forums it was mentioned that contributions to an HSA had to be done via paycheck withholdings directly and if I add money outside of that I may end up paying a small penalty or tax on it. Is this still the case?
Contributions done through a payroll cafeteria plan are exempt from SS and Medicare taxes. Direct contributions are not. That's the only "small penalty or tax".

Also, for when you file your tax return, contributions through payroll are not part of your W-2 income so no additional deduction (they will appear as employer contributions on your W-2). Direct contributions are deducted as an "above the line" deduction (Schedule 1 Part II).
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MP123
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Re: What to do with my HSA before a job change before year end

Post by MP123 »

PikaPika wrote: Thu Sep 16, 2021 3:10 pm Also am I correct in my calculations that the maximum I can contribute is equal to the number of full months I have a qualifying HDHP?
Right, it's a prorated calculation based on the number of months that you're eligible. So 10/12 if you have coverage through at least October 1.
PikaPika wrote: Thu Sep 16, 2021 3:10 pm And by extension when I searched initially on the forums it was mentioned that contributions to an HSA had to be done via paycheck withholdings directly and if I add money outside of that I may end up paying a small penalty or tax on it. Is this still the case?
There's no penalty for making direct contributions to an HSA, but if you make the contribution through payroll deduction you won't have to pay FICA (SS/Medicare) taxes on the contribution amount. If you make it with funds from your paycheck after FICA has been withheld then you will have paid FICA on the contribution amount. You could also make the contribution with dividends or CG from investments that wouldn't be subject to FICA anyway.
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PikaPika
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Re: What to do with my HSA before a job change before year end

Post by PikaPika »

MP123 wrote: Thu Sep 16, 2021 3:27 pm Right, it's a prorated calculation based on the number of months that you're eligible. So 10/12 if you have coverage through at least October 1.
Ok so it counts the months that I begin with valid coverage, thanks.
MP123 wrote: Thu Sep 16, 2021 3:27 pm There's no penalty for making direct contributions to an HSA, but if you make the contribution through payroll deduction you won't have to pay FICA (SS/Medicare) taxes on the contribution amount. If you make it with funds from your paycheck after FICA has been withheld then you will have paid FICA on the contribution amount. You could also make the contribution with dividends or CG from investments that wouldn't be subject to FICA anyway.
lstone19 wrote: Thu Sep 16, 2021 3:21 pm Contributions done through a payroll cafeteria plan are exempt from SS and Medicare taxes. Direct contributions are not. That's the only "small penalty or tax".

Also, for when you file your tax return, contributions through payroll are not part of your W-2 income so no additional deduction (they will appear as employer contributions on your W-2). Direct contributions are deducted as an "above the line" deduction (Schedule 1 Part II).
Ok so it looks like just under 8% 'penalty' if I make contributions after a paycheck. I will try to avoid that as much as possible but my employer's HSA adjustment system is quite kludgey so knowing the downside will help determine it. The other reason will be that spreading out the remaining max contribution over several months will help since in the end it could be a few thousand, which I would prefer to not come out of a single paycheck, heh.
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Re: What to do with my HSA before a job change before year end

Post by grabiner »

PikaPika wrote: Thu Sep 16, 2021 3:36 pm
lstone19 wrote: Thu Sep 16, 2021 3:21 pm Contributions done through a payroll cafeteria plan are exempt from SS and Medicare taxes. Direct contributions are not. That's the only "small penalty or tax".

Also, for when you file your tax return, contributions through payroll are not part of your W-2 income so no additional deduction (they will appear as employer contributions on your W-2). Direct contributions are deducted as an "above the line" deduction (Schedule 1 Part II).
Ok so it looks like just under 8% 'penalty' if I make contributions after a paycheck.
And it's not even that, because the reduced SS contribution reduces your SS benefit. This is usually close to break-even. (If you are over the SS limit, the reduced Medicare contribution has no cost to you, but it's only 1.45%.)
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PikaPika
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Re: What to do with my HSA before a job change before year end

Post by PikaPika »

grabiner wrote: Thu Sep 16, 2021 9:34 pm And it's not even that, because the reduced SS contribution reduces your SS benefit. This is usually close to break-even. (If you are over the SS limit, the reduced Medicare contribution has no cost to you, but it's only 1.45%.)
Sorry I am not actually following what you mean here. So this would only be the case if I was over the SS contribution limit. I am guessing you mean on an annual basis overall? I mean if I am putting money into the HSA after I get my paycheck then the SS and Medicare have already been deducted and there wouldn't be any way to get that back or excluded unless I had the HSA contribution done via the "cafeteria" withholding directly.
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Re: What to do with my HSA before a job change before year end

Post by grabiner »

PikaPika wrote: Fri Sep 17, 2021 12:14 pm
grabiner wrote: Thu Sep 16, 2021 9:34 pm And it's not even that, because the reduced SS contribution reduces your SS benefit. This is usually close to break-even. (If you are over the SS limit, the reduced Medicare contribution has no cost to you, but it's only 1.45%.)
Sorry I am not actually following what you mean here. So this would only be the case if I was over the SS contribution limit. I am guessing you mean on an annual basis overall? I mean if I am putting money into the HSA after I get my paycheck then the SS and Medicare have already been deducted and there wouldn't be any way to get that back or excluded unless I had the HSA contribution done via the "cafeteria" withholding directly.
If your total salary is over the SS contribution limit, then contributing to the HSA by payroll deduction doesn't change the amount you pay in SS, since your employer stops deducting SS tax when you go over the limit. By using payroll deduction, you pay less SS from each paycheck, but you pay SS from more paychecks to get the same total.

If your total salary is under the SS contribution limit, then you pay less SS tax by using payroll deduction. However, you will get less in SS benefits.
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Re: What to do with my HSA before a job change before year end

Post by miketheboglehead »

My suggestion would be to not let the tax tail wag the investment dog, so to speak, with respect to FICA, unless weighing against HSA plan fees.

I choose to invest with a 3rd party HSA provider because the company HSA is laden with fees (fixed plus variable).

You are thinking on the right track to max out triple tax advantaged investment space, and considering eligibility and proration in advance!

You may be able to invest in-plan now, to avoid FICA taxes, and then roll the HSA to a different institution when you separate from the employer. I think one HSA rollover per year is allowed in most plans, may be plan-dependent?
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Re: What to do with my HSA before a job change before year end

Post by PikaPika »

miketheboglehead wrote: Sat Sep 18, 2021 7:09 am My suggestion would be to not let the tax tail wag the investment dog, so to speak, with respect to FICA, unless weighing against HSA plan fees.

I choose to invest with a 3rd party HSA provider because the company HSA is laden with fees (fixed plus variable).

You are thinking on the right track to max out triple tax advantaged investment space, and considering eligibility and proration in advance!

You may be able to invest in-plan now, to avoid FICA taxes, and then roll the HSA to a different institution when you separate from the employer. I think one HSA rollover per year is allowed in most plans, may be plan-dependent?
Ok, thanks that clears up the last bit of doubt. So I am thinking in the right path just need to not worry so much about minor penalties and maximize what I am able to do for the greatest long-term advantage. In addition, it looks like my HSA provider will charge $20 to transfer to another HSA which isn't a big issue, and also seems they don't impose a limit to when. They normally charge it looks like $0.50/month as a service fee which my employer currently covers so I will certainly want to move it to Fidelity for the zero cost like someone suggested. Though there are currently investments in the fund so I'll cross that bridge later I think. So at the end of the day when it comes time I will just max out the remaining annual limits for the HSA before changing jobs and move on.
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Re: What to do with my HSA before a job change before year end

Post by terran »

PikaPika wrote: Thu Sep 16, 2021 3:10 pm HSA is currently through optum which I dont think has much in the way of fees but I will have to check their investment side. Moving to Fidelity would certainly be simple as I have an account there already and since I won't be touching it for some time maximizing that investment is good.
I also have and employer sponsored HSA at Optum (and one at Fidelity that I move the Optum money to once per year). Your employer is likely paying fees on the order of $2-3/month that you'll take over once you leave that employer. Optum likely requires you leave $2000 uninvested and there may be fees for investing (there used to be, but I'm not easily finding the fee schedule for my account right now).

If you decide to transfer to Fidelity (I would), last I checked Optum charges a $20 transfer fee. Since this is a one time thing for you it might be easier to just pay it, but if you want to avoid it you can make an indirect transfer. Just withdraw everything in the Optum account like you would if you were reimbursing yourself for medical expense and then contribute to Fidelity as a rollover contribution. It's important that it's marked as a rollover contribution, so you can't just contribute directly to Fidelity like you would for normal contributions. I use a paper form that I mail in with a check, but I think there might be workaround ways to do it electronically and/or with a phone call to Fidelity.
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