413 / When may an account owner transfer or rollover funds into an HSA?

An HSA rollover may take place only once a year. The year is not a calendar year, but a rolling 12-month period beginning on the day when an account holder receives a distribution to be rolled over.²

Transfers of HSA amounts directly from one HSA trustee to another HSA trustee, known as a trustee-to-trustee transfer, are not subject to the limits under IRC Section 223(f)(5). There is no limit on the number of trustee-to-trustee transfers allowed during a year and there is no 60-day requirement.³

Beginning in 2007, a taxpayer may, once in his or her lifetime, make a qualified HSA funding distribution ( Q 414). A qualified HSA funding distribution is a trustee-to-trustee transfer from an IRA to an HSA in an amount that does not exceed the annual HSA contribution limitation for the taxpayer ( Q 397). If a taxpayer has self-only coverage under an HDHP at the time of the transfer, but at a later date during the same taxable year obtains family coverage under an HDHP, the taxpayer may make an additional qualified HSA funding distribution in an amount not exceeding the additional annual contribution for which the taxpayer has become eligible.⁴

If a taxpayer fails to be an eligible individual at any time during a taxable year following a qualified HSA funding distribution, the taxpayer must include in gross income the aggregate amount of all qualified HSA funding distributions ( Q 406). The amount includable in gross income also is subject to a 10 percent penalty tax.⁵

Prior to January 31, 2012, a participant in a health reimbursement arrangement (“HRA”) ( Q 349) or a health flexible spending arrangement (“health FSA”) ( Q 3519) could make a qualified HSA distribution on a one time per arrangement basis. A qualified HSA distribution was a transfer directly from an employer to an HSA of an employee. The amount moved was limited to the lesser of the balance in the arrangement (FSA or HRA) on September 21, 2006, or the date of distribution. A qualified HSA distribution was treated as a rollover contribution under IRC Section 223(f)(5), which means that it did not count toward the annual HSA contribution limit.⁶ An employee completing qualified HSA distribution was subject to a testing period ( Q 406).

Prior to the sunset of this rule, the timing of qualified HSA distributions was critical for employees covered by general-purpose (non-high-deductible) health FSAs or HRAs. As such:⁷

(1)     An employee could only make a qualified HSA distribution if he or she had been covered by an HDHP since the first day of the month;

(2)     An employee had to rollover general purpose health FSA balances during the grace period after the end of the plan year, not during the plan year, and, of course, he or she must not have been covered by a general purpose health FSA during the new year; and

(3)     An employee must have rolled the entire balance in an HRA or a health FSA to an HSA (or forfeited the balance). If a balance remains in an HRA at the end of a plan year or in a health FSA at the end of the grace period, the employee will not be an HSA-eligible individual.