The Rollover Trap: Why HSA Rollovers Aren’t IRA Rollovers
By Jodie Norquist, CIP, CHSP
You may know the IRA rollover rules so well you can recite them in your sleep. But if you handle HSAs as well, don’t get tripped up on an important distinction between HSA and IRA rollovers.
At first glance, the rules seem similar. Both involve moving money from one account to another where the account owner takes receipt of the assets but must timely redeposit the funds into the same or another account so it doesn’t create a taxable event. This is unlike a transfer, where the client can’t cash the check or the funds are sent directly to the financial organization.
Both IRAs and HSAs are subject to the 60-day and the one-per-12-month rollover rules, but there is a big difference in how the one-per-12-month rule applies.
IRA Rollovers: One Distribution, Multiple Contributions
For IRAs, the rollover process begins with a single distribution. The account owner receives the assets from one IRA and has 60 days to complete the rollover by depositing those funds into the same account or another eligible account. The 60-day clock starts the day after the account owner receives the distribution.
Think of an IRA rollover as one distribution. An IRA owner can contribute portions of that distribution in multiple rollover contributions within the 60-day rollover period but can’t contribute more than the amount of the one distribution. Additionally, an IRA owner can only roll one distribution back into an IRA within a 12-month period.
Example: Bill, age 56, is remodeling his home and wants to take a $50,000 distribution from his IRA to use temporarily for the next 60 days. He then wants to recontribute this amount back to his IRA. As he’s working on the project, he makes three rollover contributions, $10,000, $25,000, and $15,000, to his IRA within that 60-day window. This is a valid IRA rollover.
Example: Marcia, age 43, wants to update the landscaping around her property. She takes a $5,000 distribution from her IRA. A week later, she takes another $5,000 distribution from another IRA she owns because she needs additional funds to finish the project. She wants to roll $10,000 back into an IRA within the 60-day window. However, she cannot. She can roll only one $5,000 back into any of her IRAs because of the one-per-12-month rollover rule. The second $5,000 distribution will become a taxable event and is subject to a 10 percent penalty because Marcia is under age 59½ and does not have a penalty tax exception.
The key point is that an IRA rollover begins with one distribution and may end with multiple rollover contributions.
HSA Rollovers: Multiple Distributions, One Contribution
The IRS designed HSA rollover rules differently.
An HSA owner may take multiple distributions from an HSA and then redeposit those funds into another HSA as a single rollover contribution, provided all funds are contributed within the applicable 60-day period.
Example: Erika, age 32, withdrew $1,000 on Monday, $2,000 on Wednesday, and another $2,000 the following week from the same HSA, thinking she needed these funds for qualified HSA expenses. She decided not to go through with a scheduled medical procedure, so she wants to roll her distributions back into her HSA. Erika makes a $5,000 rollover contribution to her HSA within the 60-day period. This is a valid HSA rollover.
HSA rollovers can involve one or multiple distributions but only one rollover contribution.
This is the exact opposite of the flexibility afforded under IRA rollover rules.
The One-Per-12-Month Rule Adds Another Twist
Individuals can generally complete only one HSA rollover during a 12-month period, regardless of how many HSAs they may own. The same rule applies to IRAs. But the 12-month period for IRAs starts the day after the IRA owner receives the distribution. For HSAs, it starts on the day the HSA rollover contribution was deposited, not on the date of the HSA distribution (or distributions).
It’s important to note that the IRS allows IRA and HSA owners to violate the one-per-12-month rollover rule if the distribution is coming from an insolvent financial organization.
The Bottom Line
Because many financial organizations administer both IRAs and HSAs, it is easy for rollover rules to blur together. Understanding that IRA rollovers involve a single distribution that may be deposited into multiple receiving accounts, while HSA rollovers may combine multiple distributions into a single rollover contribution can help prevent reporting errors, reduce confusion, and improve the guidance you provide to your clients.
With rollovers, the terminology may be similar, but the rules are anything but.
