Your Money: What to do with your dormant Health Savings Account
NEW YORK A Health Savings Account is supposed to stay with you for life, but if you do not use it, you could lose actually lose it.
HSAs are intended to make medical expenses more affordable by allowing consumers with high-deductible health plans to set aside pretax money in an account that, unlike a Flexible Spending Account, will not expire at the end of the year.
You can keep these accounts as you change jobs, which allows you to build up funds that you can spend as you need to or save for retirement.
But at least 24 percent of the 20 million-plus Americans with these accounts leave them inactive, according to research firm Devenir.
Some may not have enough extra cash to deposit. Some currently may not be eligible to put in money because they have changed health plans. Some may have simply have forgotten they opened the accounts in the first place.
When an HSA account sits for too long with no activity, the bank holding it has several options, one of which is to turn the money over to the state as unclaimed funds.
Before that happens, however, you will probably get a very sternly worded letter filled with arcane terminology about state escheatment law.
In escheatment, the state takes control of unclaimed assets, including bank accounts abandoned by people who cannot be reached because they have moved or died, settlement funds from lawsuits, or other awards that were never claimed. Several websites, like unclaimed.org, allow you to check by state to see if there are registered funds in your name.
Because Health Savings Accounts are often held by banks or credit unions that treat them as regular checking accounts, rather than as retirement investment accounts like an IRA, they can fall under escheatment law, depending on the state.
"If the account is in checking, it might be one set of state rules; if it's in a brokerage, it might be different rules," said Steve Christenson, executive vice president of retirement and savings plan provider Ascensus.
Christenson himself has four separate HSA accounts. While he stays on top of them, he can understand how employees who hopscotch employers and providers can lose track.
Here is what to do if you have a dormant HSA account:
* Tell the bank that you want to keep the account
The average HSA balance is $1,844, according to the Employee Benefit Research Institute.
There is a benefit to keeping the account open, even with a zero or low balance, said HSA Consulting Services President Roy Ramthun. Even if you cannot contribute right now, you may be able to do so in the future.
Internal Revenue Service rules start the clock on eligible expenses when you open the HSA account, not when you put in money. So you could keep your receipts for medical costs now and reimburse yourself whenever you can make deposits.
* Compound the interest
Most people keep their HSA money in cash via a checking-type account, but if you have any significant balance at all, you can invest the money and let the magic of compounding work for you. Ten years from now, your $1,000 could be worth $1,790 if you put it in an index fund that earns 6 percent, and that gain would be tax-free.
"We want it to be a longer-term vehicle, so removing the account is counter to that," said Eric Dowley, senior vice president of Fidelity's HSA division.
Fidelity generally treats HSAs like it does IRAs and does not seek to close low-balance accounts, he added.
* Move the account to a friendlier bank
If you got one of those scary letters saying your HSA was about to be seized and your financial institution does not seem happy about keeping a dormant account, shop around and pay close attention to fees.
* Spend the money
If you close your HSA and withdraw the funds that are left, you will have to pay taxes and fees that could eat up your whole balance.
Instead, you could just spend the money on qualified expenses like contact lenses or prescriptions, and then close the emptied account.
(Editing by Lauren Young and Lisa Von Ahn)