What Happens If You Close Your HSA: Taxes, Penalties, and Forms

If you close your Health Savings Account and take the balance in cash, every dollar you don’t spend on qualified medical expenses becomes ordinary taxable income for that year, and if you’re under 65 the IRS adds a 20% additional tax on top of the income tax.¹ Before you go through with a closure, know that losing eligibility to contribute doesn’t force you to shut the account down. The existing balance can sit there indefinitely and still be spent tax-free on medical costs.

How the Cash-Out Is Taxed

Money taken from an HSA and used for qualified medical expenses comes out tax-free. Qualified expenses include doctor visits, prescriptions, dental care, vision care, and most other out-of-pocket health costs.¹ If you close the account and move the proceeds into a regular checking account, only the portion you actually spend on those expenses stays untaxed.

Anything else counts as gross income on your federal return at your ordinary income tax rate, the same rate that applies to wages. A large balance can push you into a higher bracket the year you take it out.²

The 20% Additional Tax

On top of income tax, the IRS applies a separate 20% additional tax on any distribution included in your gross income, meaning the portion that didn’t go to qualified medical expenses.¹ Withdraw $5,000 and spend none of it on medical care, and you owe your marginal income tax rate on the full $5,000 plus another $1,000.

Three situations remove the 20% penalty:

Reaching age 65. After 65, you can withdraw for any purpose without the extra tax. Ordinary income tax still applies to non-medical withdrawals, so the account functions like a traditional retirement account at that point.³
Permanent disability. The penalty no longer applies to your distributions.
Death. Distributions after the account holder’s death are not subject to the 20% tax.¹

You Probably Don’t Have to Close It

Switching to a health plan that isn’t high-deductible, or leaving a job, doesn’t require you to close your HSA. It only means you can no longer contribute. The balance already inside is unaffected. You can keep the account open, let it grow tax-free, and pull funds out for qualified medical expenses at any age without owing tax or penalty.²

HSA balances roll over with no expiration.⁴ If the money is in mutual funds or other investments, those keep growing without triggering capital gains tax. The main practical reason to close is if the custodian charges ongoing maintenance fees that outweigh the value of keeping the balance where it sits.

Moving the Balance Instead of Cashing Out

If the reason you’re closing is high fees or poor investment options, you can move the money to a different HSA with no tax consequences. Two methods exist, and they follow different rules.

Direct Trustee-to-Trustee Transfer

A direct transfer sends the money straight from the old custodian to the new one. The funds never pass through your hands. The IRS doesn’t treat this as a distribution or a rollover, so there’s no limit on how often you can do it, no Form 8889 reporting, and no way to accidentally trigger tax.² This is the safest route.

Indirect Rollover

With an indirect rollover, the old custodian sends the money to you, and you deposit it into the new HSA yourself. You have 60 days to complete the deposit. Miss that deadline and the IRS treats the whole amount as a taxable distribution, income tax plus the 20% penalty if you’re under 65. You’re also limited to one indirect rollover per 12-month period.³

Fix Excess Contributions First

If you contributed more than the annual limit, or kept contributing after losing high-deductible plan eligibility, that excess sits in the account with a 6% excise tax charged every year it stays there.² Closing the account doesn’t wipe this out. You have to deal with the overage first.

To avoid the 6% tax, withdraw the excess and any earnings it produced before your tax filing deadline (including extensions) for the year the excess occurred. You can’t deduct the withdrawn contributions, and the earnings are reported as income.³ If you already filed without fixing it, you still have six months from the original due date to make the withdrawal and file an amended return.

For 2026, the annual HSA contribution limits are $4,400 for self-only coverage and $8,750 for family coverage.⁵ There’s an additional $1,000 catch-up contribution available at age 55 or older.¹

Pro-Rated Limits in the Year You Close

If you’re closing partway through the year because you’ve lost high-deductible coverage, your contribution limit for that year is typically pro-rated. The IRS divides the annual limit by 12 and multiplies by the number of months you had qualifying coverage. You count as eligible for any month in which you had high-deductible coverage on the first day of that month.²

Enrolling in Medicare drops your contribution limit to zero starting with the first month of Medicare coverage. This applies even when Medicare enrollment is retroactive. Any contributions made during a retroactive coverage period become excess contributions subject to the 6% excise tax.²

How the Closure Actually Works

Most custodians require a formal distribution request or account closure form, usually found in the forms section of their online portal. A phone call or email won’t do it. You have to submit the completed paperwork through the custodian’s secure upload system or by mail.

On the form you’ll pick a reason for the distribution: a normal cash-out, a rollover to another HSA, or removal of excess contributions. If you want the balance sent electronically, you’ll provide routing and account numbers for the receiving bank. Verify these carefully. A wrong number can delay the money or send it to the wrong account.

If your HSA holds investments, the custodian liquidates them and converts everything to cash before the final distribution. Market movement during that window may change your final balance slightly. Some custodians charge a closure or transfer-out fee, which comes out of the balance before payout. After fees and sales settle, most custodians deliver the funds within roughly seven to fourteen business days.

Download your transaction history and year-end statements before portal access is shut off. Those records matter for your tax return and for documenting which distributions covered medical expenses.

Tax Forms You’ll Receive After Closing

Closing generates several tax documents for the following filing season.

Form 1099-SA

The custodian sends Form 1099-SA reporting total distributions from your HSA during the calendar year. It includes a distribution code showing whether the money went to medical expenses, a rollover, or a general withdrawal.⁶ Expect it by January 31 of the year after closure.

Form 5498-SA

Form 5498-SA reports the fair market value of the account and any contributions made during the year.⁷ Because contributions can be made up to the April tax filing deadline for the prior year, custodians have until May 31 to send this form.⁶

Filing Form 8889

You use the information from Form 1099-SA to complete Form 8889, which attaches to your Form 1040. Form 8889 is where you report HSA contributions, calculate taxable distributions, and figure any additional tax owed.³ File it even if every dollar went to qualified medical expenses and nothing is taxable.⁸ Keep receipts and records that prove which withdrawals covered medical costs. The IRS can request documentation, and without it the agency may treat the whole distribution as taxable.

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
Internal Revenue Service. Instructions for Form 8889 (2025)
4
HealthCare.gov. How Health Savings Account-Eligible Plans Work
5
Internal Revenue Service. Revenue Procedure 2025-19
6
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA (12/2026)
7
Internal Revenue Service. Form 5498-SA (Rev. December 2026) HSA, Archer MSA, or Medicare Advantage MSA Information
8
Internal Revenue Service. Form 1099-SA Distributions From an HSA, Archer MSA, or Medicare Advantage MSA