Can I Cash Out My HSA When I Leave My Job?

Yes, you can cash out your HSA when leaving your job. The account belongs to you, not your employer, and you can withdraw from it at any time. If the money goes to qualified medical expenses, the withdrawal is tax-free. If you take it for anything else before age 65, you’ll owe ordinary income tax on the amount plus an additional 20% tax.¹

The Account Is Yours to Keep

An HSA is not like a Flexible Spending Account. It doesn’t reset at year-end and doesn’t revert to your employer when you leave. Whether you resign, get laid off, or retire, the balance stays with you.² Your former employer has no claim to the money and cannot close the account.

The funds never expire. Any unspent balance rolls over indefinitely, and you can leave it invested and growing for years if you choose. That portability is what makes cashing out a real option rather than a use-it-or-lose-it scramble.

Tax-Free Withdrawals for Medical Costs

To pull money out without owing tax, spend it on qualified medical expenses as defined under Section 213(d) of the Internal Revenue Code.³ That covers a wide range of costs: doctor visits, prescription drugs, dental care, vision, mental health treatment, and medical equipment.

Since the CARES Act took effect in 2020, over-the-counter medications and menstrual care products qualify without a prescription. Pain relievers, allergy medicine, heartburn medication, tampons, and pads can all be paid for tax-free from the account.⁴

The expense must have been incurred after your HSA was opened; you can’t reach back and reimburse costs from before the account existed. But there’s no deadline going the other way. If you paid out of pocket for a qualifying expense two or three years ago, and the account was already open then, you can reimburse yourself from the HSA today. Keep the itemized receipts and insurance explanations of benefits so you can document the expense if the IRS asks.

Paying Health Premiums Between Jobs

Health insurance premiums generally are not qualified medical expenses, but there are specific exceptions that matter when you’ve just lost coverage:

COBRA continuation premiums are tax-free from your HSA.
Any health insurance premiums you pay while receiving federal or state unemployment compensation qualify.
Once you turn 65, Medicare Part B, Part D, and Medicare Advantage premiums qualify. Medigap supplemental policies do not.
Long-term care insurance premiums qualify up to age-based limits that adjust annually.

These exceptions are set out in IRS Publication 969.² COBRA is expensive because you’re covering the full premium your employer used to subsidize, so being able to pay it from the HSA without tax is worth knowing about before you decide to cash the account out for other reasons.

What a Non-Medical Cash-Out Actually Costs

If you withdraw HSA funds and use them for anything other than qualified medical expenses, the amount gets added to your taxable income for the year. On top of that, you owe an additional 20% tax if you’re under age 65.¹

Run the numbers before you do this. Say you’re in the 22% federal bracket and take out $5,000 for a non-medical reason at age 40. You’d owe $1,100 in income tax plus a $1,000 additional tax. Combined hit: $2,100. You keep $2,900 of the $5,000. State income tax, if your state taxes the withdrawal, comes on top of that.

After 65 or If You Become Disabled

The 20% additional tax disappears at age 65. Non-medical withdrawals are still taxed as ordinary income after that, but with no penalty the account functions much like a traditional IRA.¹ The same penalty waiver applies if you become disabled, meaning unable to engage in any substantial gainful activity because of a physical or mental condition expected to last indefinitely or result in death.

Fixing a Mistaken Withdrawal

If you took a distribution thinking an expense qualified when it didn’t, you can put the money back into the HSA and undo the tax hit. The repayment has to happen by the due date of your tax return, not counting extensions, for the year you discovered the mistake.⁵ Not every custodian accepts returned distributions, so call yours before assuming you can reverse it.

How to Take the Money Out

The mechanics are simple. Log into your HSA custodian’s online portal and go to the distribution section. If you don’t have digital access, most custodians accept paper distribution forms by mail or fax. You choose between an electronic transfer to your bank account or a paper check.

The request will ask you to select a reason: normal distribution, disability, or death benefit. Pick accurately, because the code the custodian assigns determines how the withdrawal is reported to the IRS.

Electronic transfers usually take three to five business days. Paper checks run seven to ten business days. You’ll need your HSA login or account number and the routing and account numbers for the bank account receiving the funds.

Tax Forms After You Withdraw

After year-end, your custodian issues Form 1099-SA showing all distributions from the account during the tax year.⁶ You use that number on Form 8889 when filing your federal return, where you report how much of the distribution went to qualified medical expenses. Whatever didn’t is what gets taxed. These forms are usually available by January 31 for the prior tax year. Hold on to your medical receipts and explanations of benefits so you can reconcile them against what the custodian reported.

If You’d Rather Keep the Account Open

Cashing out isn’t the only option. You can leave the balance where it is, or move it to a different custodian with lower fees or better investment choices. There are two ways to move it:

A trustee-to-trustee transfer sends the funds directly from your current custodian to the new one. It doesn’t count as a distribution, doesn’t get reported on your tax return, and has no limit on how often you can do it.⁷
A 60-day rollover means you take the money and redeposit it into a new HSA within 60 days. It’s limited to once every 12 months, and missing the 60-day window turns the withdrawal into a taxable distribution with the 20% additional tax if you’re under 65.⁷

The trustee-to-trustee transfer is the safer path in almost every case. Contact the new custodian to start it; most handle the paperwork on your end.

Contributing After You Leave

Withdrawing from an HSA and contributing to one are governed by different rules. You can withdraw from the account whether or not you have health insurance. To keep contributing, though, you have to be enrolled in a qualifying high-deductible health plan on the first day of the month. Once you lose HDHP coverage, contributions stop, and your annual contribution limit is prorated based on the number of months you were covered.² Losing eligibility to contribute doesn’t lock the existing balance; you can still spend it down on qualified medical expenses tax-free for the rest of your life.

1
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
2
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
3
Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses
4
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
5
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
6
Internal Revenue Service. About Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
7
Internal Revenue Service. Instructions for Form 8889