HSA account status if one cancels HDHP insurance?

Question

After signing up for a High Deductable Health Plan (HDHP) for 2008, I opened a HSA account and funded it with a pretax dollars from an IRA. What are the implcations and what do I need to do with my HSA account, if I cancel the HDHP insurance coverage this year? Can I still use it for health expenses?

Answer 1

If you cancel the HDHP before you have had it a full year you will be required to withdraw some of the funds you deposited. You will have to pay taxes and a 10% penalty since the fuds came from an IRA. If you have a family plan the most you deposit for each month you had the HDHP is $470.83, if you have a single plan $237.50.

Some agents are confused on this. Even though you are allowed to deposit the entire annual amount up front if you cancel the plan in the first year you will have to take out the excess contributions.

If you cancel your HDHP plan after the first full 12 months you can keep the HSA and still spend the money tax free as long as it is on qualified expenses. You can even spend the HSA money on your new plan co-pays, etc.

If you are not happy with your current HDHP you can always switch to a new provider.