As of December 31, 2023, U.S. individuals held over 37 million HSA accounts with $123 billion in assets marking a 5% increase in accounts and 19% growth in assets year-over-year.For many individuals, families, and employees of small businesses, navigating the world of health benefits can be complex. A Health Spending Account (HSA) is a valuable tool designed to offer flexibility and tax savings for medical expenses. But a common question arises as the year-end approaches: what happens to the money in my HSA if I don't use it all?
Understanding the fate of your unspent HSA funds is crucial for effective financial planning. Whether you're in Canada with a Health Spending Account or in the United States with a Health Savings Account, the rules governing these accounts can significantly impact your long-term health and financial well-being. This blog will delve into the intricacies of unused HSA money, helping you make informed decisions to maximize this powerful benefit.
At its core, a Health Spending Account is a tax-advantaged account that allows individuals to set aside money for eligible healthcare expenses. In Canada, it's typically referred to as a Health Spending Account (HSA) or a Private Health Services Plan (PHSP). In the United States, it's known as a Health Savings Account (HSA). Both serve a similar purpose: to provide a tax-efficient way to pay for out-of-pocket medical costs.
While both accounts are designed for health-related expenses, there are fundamental differences. A key distinction is that Canadian HSAs are typically funded by the employer, offering a defined amount of money for employees to use on a tax-free basis for eligible medical expenses. U.S. HSAs, on the other hand, can be contributed to by both the employee and the employer and are paired with a high-deductible health plan (HDHP). U.S. HSAs also offer investment options and are owned by the individual, making them highly portable.
In Canada, HSAs are a popular choice for small business owners, incorporated individuals, and companies of all sizes looking to provide flexible health benefits to their employees. Self-employed individuals can also set up a PHSP. In the U.S., individuals must be enrolled in an HDHP to be eligible to contribute to an HSA.
One of the most frequently asked questions is what happens to unused HSA funds when the benefit year ends. The answer provides one of the most compelling reasons to have an HSA.
Also Read: HSA vs. WSA: Understanding the Key Differences and Choosing the Right Employee Benefit
In Canada, the specifics of the HSA carry forward rules are dictated by the employer's plan design. A small business might implement a one-year rollover to help employees save for things like orthodontics or laser eye surgery. Larger companies might have slightly different policies. The key takeaway is that the employer sets the policy within the guidelines permitted by the CRA. It's incumbent upon the employee to be aware of these specific carry-forward provisions to avoid any potential forfeiture of funds, which can happen if left unclaimed beyond the rollover period.
This is a defining feature, particularly in the U.S. The money in a U.S. Health Savings Account belongs to the individual employee, not the employer who may have contributed to it. This ownership is absolute. This means the account is portable and remains with you regardless of your employment status. In Canada, the structure is more of a benefit plan, and while the funds are allocated for your use, the concept of "ownership" can be different, especially when changing jobs.
Here lies one of the most significant distinctions between U.S. and Canadian accounts. U.S. HSAs are designed not just for spending, but for saving and growth. Many HSA providers offer options to invest your funds once a minimum balance (e.g., $1,000 or $2,000) is reached. These investment options are similar to a 401(k) or IRA, including a selection of mutual funds, ETFs, and stocks. Some accounts may also offer a simple interest-bearing savings option.
Conversely, Canadian HSAs are generally not investment vehicles. They function as reimbursement or allocation accounts, where the primary benefit is the tax-free nature of the funds for medical expenses, not the potential for capital growth.
For U.S. account holders, the ability to invest creates a powerful wealth-building tool. Any interest, dividends, or capital gains earned on the investments within the HSA are completely tax-free. This allows the funds to compound over decades, leading to substantial growth that is shielded from taxation, a crucial component of the health savings account tax benefits.
The combination of rollover funds and tax-free growth transforms a U.S. HSA from a simple spending account into a dedicated, long-term healthcare fund. This can be used for emergencies, planned major procedures, or, most strategically, for healthcare costs in retirement. It provides peace of mind, knowing a dedicated, tax-advantaged fund is available for future health uncertainties.
Yes, this is a fundamental feature of the HSA. People often ask what I can use my HSA for? You can pay for eligible medical expenses such as prescriptions, physical therapy, vision care, and even some over-the-counter products.The funds you don't use today can be used to pay for qualified medical expenses one, five, or twenty years from now. The list of eligible expenses is extensive, covering everything from dental and vision care to prescriptions, physical therapy, and medical equipment. You can let your balance accumulate and deploy it when you have a significant medical need.
HSAs play a vital role in HSA retirement planning. In the U.S., after you turn 65, the rules for HSAs become even more flexible. While you can still withdraw funds tax-free for medical expenses (including Medicare premiums), you can also withdraw money for any other reason without the typical 20% penalty. These non-medical withdrawals are simply treated as taxable income, similar to a traditional IRA or 401(k). This feature provides an additional source of retirement income if the funds are not needed for healthcare.
HSA funds are not just for the account holder. They can be used to pay for the qualified medical expenses of your spouse and any eligible dependents, even if they are not covered by your high-deductible health plan. This makes the HSA a flexible tool for managing the healthcare costs of your entire family.
One of the most common and effective uses of an HSA is to budget for and pay for significant medical services that are often poorly covered by basic insurance plans. This can include orthodontia for your children, LASIK surgery, a new pair of prescription glasses or contacts, or mental health therapy sessions.
Life is unpredictable. Having a dedicated fund for a sudden medical emergency can prevent you from having to dip into your regular savings or go into debt. The ability to save HSA money over time means you can build a substantial buffer for unexpected surgeries or treatments.
For those who can afford to pay for current medical expenses out-of-pocket, the ultimate strategy is to treat the HSA as a supercharged retirement account. By contributing the maximum each year and investing the funds (in the U.S.), you can build a tax-free nest egg specifically for the high cost of healthcare in your golden years.
At its most basic level, the HSA is a perfect companion to your health insurance. You can use the tax-advantaged funds to pay for your annual deductible, as well as any co-pays or coinsurance you owe throughout the year, effectively reducing your out-of-pocket costs by your marginal tax rate.
Interesting Read: How to Integrate HSAs into Your Existing Benefit Structure
The fate of an unused HSA after leaving a job in Canada depends on the plan's structure. For a typical employer-provided group plan, you will usually have a set grace period (e.g., 30-90 days) after your termination date to submit claims for expenses incurred while you were still an active employee. Any unused funds after that deadline are generally forfeited. If you have a private HSA as a self-employed individual or small business owner, the plan is yours and is unaffected by changes in employment.
Portability is a hallmark of the U.S. HSA. Since you own the account, it is not tied to your employer. When you change jobs, the HSA comes with you. You can continue to contribute to it if your new employer offers an HSA-qualified health plan, or you can simply use the existing funds for future medical expenses.
Upon retirement, U.S. individuals maintain full control of their HSA. For Canadians, the options at retirement can vary. Some plans may allow a retiree to continue to claim expenses for a period, while others offer a unique and valuable option: the ability to roll over the remaining HSA balance into a Registered Retirement Savings Plan (RRSP), converting your health benefit into retirement savings.
Navigating the alphabet soup of benefit accounts can be confusing. Here’s a quick breakdown of the key differences in the HSA vs FSA vs WSA debate.
For long-term saving, there is no contest: the HSA is superior. Its ability to carry forward indefinitely (in the U.S.) and potential for tax-free investment growth make it a powerful financial tool for the future. FSAs and WSAs are designed for short-term, annual spending.
The U.S. HSA is lauded for its unparalleled triple tax advantage:
In both countries, the core tax benefit is using pre-tax dollars for healthcare. When you are reimbursed from a Canadian HSA or make a qualified withdrawal from a U.S. HSA, you are using money that has not been and will not be taxed. This provides a direct and immediate financial saving.
By not spending your HSA funds immediately, especially in the U.S., you leverage the power of tax-free compounding. Paying for smaller medical expenses out-of-pocket and allowing your HSA to grow can result in a much larger fund down the road, making it a cornerstone of a sound financial and retirement plan.
While uncommon, it is possible to lose funds. In Canada, the primary risk is not submitting claims within the allowed timeframe, especially after the 12-month carry-forward period. If your plan has a 24-month ultimate deadline, failing to use the funds by then can result in forfeiture.
Using HSA funds for non-qualified expenses will have tax consequences. In the U.S., this means the withdrawal will be taxed as ordinary income and will also be subject to a 20% penalty if you are under age 65.
This is most critical when changing jobs in Canada. You have a limited window to claim expenses incurred during your employment. If you miss this deadline, the unused funds are lost. It’s vital to be organized and prompt with your final submissions.
Even if you're playing the long game and not reimbursing yourself immediately (a strategy for U.S. account holders), keep meticulous digital or physical copies of all medical expense receipts. This allows you to reimburse yourself tax-free years or even decades later.
Benefit plans can change. Each year, take the time to review your HSA's rules regarding contribution limits, carry-forward policies, and the list of eligible expenses to ensure you are making the most of your plan.
If your budget permits, contributing the maximum annual amount is the fastest way to build a robust healthcare fund. Be sure to review the current HSA limits set by your employer (in Canada) or the IRS (in the U.S.) to avoid overcontributions. This is especially true for U.S. account holders who can then invest that larger sum for greater potential growth.
Most HSA providers offer online portals or mobile apps. Use these tools to monitor your balance, track your contributions, and plan how you will use your funds for upcoming medical needs or long-term savings goals.
Whether you're managing a Health Spending Account in Canada or a Health Savings Account in the United States, one thing is clear: these accounts are more than just a way to pay medical bills, they are powerful tools for financial planning. Unused HSA funds don’t have to go to waste. With thoughtful strategy, you can save for future medical costs, maximize tax benefits, and even invest for long-term growth.
From covering dental care and therapy to building a healthcare safety net in retirement, HSAs provide flexibility that few other benefits offer. Understanding how HSA rollover rules work, what you can use your HSA for, and how to make the most of your contributions is essential especially as year-end or career transitions approach.
So, can you have an HSA if you have insurance? Yes and you should. Used wisely, your HSA can support not only your health today, but also your financial security tomorrow.
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In the U.S., HSA money never expires. In Canada, most Health Spending Accounts allow you to carry forward unused funds for at least one year, but they may be forfeited if not used within a longer period (e.g., 24 months).
In the U.S., your Health Savings Account is portable, and the money is yours to keep. For a Canadian unused HSA after leaving a job, you typically have a window to claim expenses incurred before your departure.
You can save it for future medical expenses, invest it (in the U.S.), or in some Canadian plans, roll it over into an RRSP upon retirement.
This depends on your financial situation. If you can afford to, saving and investing your HSA funds (in the U.S.) can provide significant long-term benefits.
Yes. In the U.S., if your spouse is the beneficiary, they can take over the HSA as their own. Other beneficiaries will receive the funds, but they will be taxable.
Yes, most Canadian HSA plans have HSA carry forward rules that allow unused funds to be rolled over for at least one year.
In the U.S., you can continue to use your HSA tax-free for medical expenses. In Canada, you may have options to roll unused funds into an RRSP as part of your HSA retirement planning.
Absolutely. HSA can be used for dental treatments such as exams, fillings, crowns, braces, and more.
