Closing an HSA or FSA triggers different tax consequences depending on how you use the money and which account type you have

An HSA (Health Savings Account) and an FSA (Flexible Spending Account) are both tax-advantaged, but they work differently when you close them. With an HSA, you can withdraw money tax-free as long as you use it for may have access to medical expenses — even years after you close the account. With an FSA, you generally lose any money you don't spend by the end of the plan year, and withdrawals for non-medical expenses trigger taxes and penalties. The tax hit depends on what you withdraw, when you withdraw it, and whether the money was actually spent on medical care.

Key Takeaways

  • HSA withdrawals for may have access to medical expenses are never taxed, even after you close the account or leave your job.
  • FSA money you don't spend by the end of the plan year is forfeited — you cannot withdraw it, and the account simply closes with that money gone.
  • Non-medical HSA withdrawals are taxed as ordinary income plus a 20 percent penalty if you are under 65; after 65, only income tax applies.
  • If you close an HSA to switch to a different health plan, you can roll the balance to a new HSA without any tax consequences.
  • Withdrawals from either account for non-may have access to expenses (cosmetic surgery, gym memberships, over-the-counter items without a prescription) count as taxable income.

How HSA closures affect your taxes

When you close an HSA, the tax treatment depends entirely on what you do with the money. If you withdraw funds and use them to pay for may have access to medical expenses — doctor visits, prescriptions, dental work, vision care, hospital bills — there is no tax consequence, regardless of when you close the account. You can close the HSA today and withdraw money next year to reimburse yourself for medical bills from five years ago, and the IRS will not tax that withdrawal.

If you withdraw money from a closed HSA for anything other than may have access to medical expenses, you owe income tax on that amount. If you are under 65, you also owe a 20 percent penalty on top of the income tax. If you are 65 or older, the penalty goes away, but the income tax remains. For example, if you withdraw $5,000 from a closed HSA for non-medical reasons and you are 45 years old, and your tax bracket is 22 percent, you would owe $1,100 in income tax plus $1,000 in penalty — $2,100 total.

The simplest way to avoid this is to leave the HSA open even if you are not using it actively. Many HSAs have no monthly fee and no requirement to contribute. You can keep the account dormant and withdraw money for medical expenses whenever you need it, with no time limit and no tax consequence.

How FSA closures work — and why you cannot withdraw unused money

An FSA operates under a "use-it-or-lose-it" rule that is legally binding. Any money you do not spend on may have access to medical expenses by the end of the plan year is forfeited to your employer or the plan administrator. You cannot close the account and withdraw the remaining balance. The money simply disappears from your account.

This is the single biggest difference between an FSA and an HSA. Because of this rule, there is no tax consequence to closing an FSA — there is nothing to withdraw. However, if you do withdraw money from an FSA before the plan year ends (which some plans allow), that withdrawal is only tax-free if you use it for may have access to medical expenses. Non-medical withdrawals are taxed as ordinary income, with no penalty.

Some employers offer a "grace period" of up to 2.5 months after the plan year ends, during which you can still spend down your FSA balance. A few plans also allow a "carryover" of up to $640 (this amount changes yearly) into the next plan year. Check your plan documents or ask your HR department whether either option applies to you.

Rolling an HSA to a new account without tax consequences

If you are closing an HSA because you are changing jobs or switching health plans, you can move the entire balance to a new HSA without any tax impact. This is called a trustee-to-trustee transfer, and it is not counted as a withdrawal. The money moves directly from the old HSA custodian to the new one, and you receive no tax form and owe no taxes.

To do this, contact the new HSA provider and ask them to initiate the transfer. Provide them with the account number and custodian information for your old HSA. The transfer typically takes one to two weeks. Do not withdraw the money yourself and then deposit it into the new account — that counts as a withdrawal and may trigger taxes and penalties if you do not redeposit it within 60 days.

If you do withdraw the money yourself and redeposit it within 60 days, the IRS treats it as a rollover and there is no tax consequence. However, you can only do this once per year, and if you miss the 60-day window, the withdrawal is taxed as ordinary income plus the 20 percent penalty (if you are under 65).

may have access to medical expenses and what the IRS actually allows

The IRS has a specific list of what counts as a may have access to medical expense for HSA and FSA purposes. The obvious ones are covered: doctor visits, hospital stays, prescription medications, dental work, vision care, hearing aids, and mental health treatment. Less obvious ones that are covered include acupuncture, chiropractic care, physical therapy, and certain medical equipment like crutches or wheelchairs.

Over-the-counter medications are covered only if you have a prescription from a doctor. Vitamins and supplements are not covered unless they treat a specific medical condition and you have a doctor's note. Cosmetic procedures are not covered, even if they are performed by a medical professional. Gym memberships, weight loss programs, and general wellness expenses are not covered. If you are unsure whether a specific expense qualifies, the IRS publishes a full list on its website, or you can ask your HSA or FSA administrator.

Keep receipts and documentation for any medical expenses you plan to reimburse yourself from a closed HSA. If the IRS audits you, you will need to show that the expenses were actually incurred and that they were may have access to medical expenses.

What happens if you close an HSA before age 65

Closing an HSA before you turn 65 does not change the tax rules — you can still withdraw money for may have access to medical expenses tax-free at any point in the future. However, if you withdraw money for non-medical reasons before 65, you pay both income tax and a 20 percent penalty. After you turn 65, the penalty disappears, and non-medical withdrawals are taxed only as ordinary income (the same as a traditional IRA).

Some people intentionally keep their HSA open into retirement specifically because of this rule. After 65, an HSA functions like a traditional retirement account — you can withdraw money for any reason and only pay income tax, with no penalty. Before 65, the account is strictly for medical expenses if you want to avoid the penalty.

Reporting HSA and FSA closures on your tax return

If you close an HSA and withdraw money for non-medical expenses, the HSA custodian will send you a Form 1099-SA at the end of the tax year. This form reports the total amount you withdrew. You will also receive a Form 8889, which is the form you use to report HSA activity on your tax return. On Form 8889, you report the withdrawal and calculate whether it was for a may have access to medical expense or not.

If you withdraw money for a non-may have access to expense, you report that amount as taxable income on your return and calculate the 20 percent penalty (if you are under 65). The penalty is reported on Form 8889 and added to your tax liability.

FSA closures do not typically generate tax forms because you are not withdrawing money — the unused balance is simply forfeited. However, if you did make withdrawals from your FSA during the year, your employer will report those on your W-2 or a separate statement, and they are already excluded from your taxable income (that is the whole point of the FSA). You do not need to report anything additional on your tax return.

Frequently Asked Questions

Can I withdraw money from my HSA after I close it?

Yes. You can close an HSA and withdraw money from it years later, as long as you use the withdrawal for a may have access to medical expense. The withdrawal is tax-free regardless of when you close the account. Non-medical withdrawals are taxed as ordinary income plus a 20 percent penalty if you are under 65.

Do I lose my FSA money if I close the account?

Yes. FSA money you do not spend by the end of the plan year is forfeited — you cannot withdraw it. This is the "use-it-or-lose-it" rule. Some plans offer a grace period or carryover option, so check your plan documents before the year ends.

What if I close my HSA and open a new one at a different bank?

You can transfer the balance from the old HSA to the new one without any tax consequence. Ask the new HSA provider to initiate a trustee-to-trustee transfer. Do not withdraw the money yourself unless you can redeposit it within 60 days, or you may trigger taxes and penalties.

Is there a penalty for closing an HSA early?

No penalty for closing the account itself. However, if you withdraw money for non-medical reasons before age 65, you owe a 20 percent penalty plus income tax on that withdrawal. After 65, the penalty is waived.

Do I have to report a closed HSA or FSA on my taxes?

If you closed an HSA and made non-medical withdrawals, the custodian sends you Form 1099-SA and Form 8889, which you use to report the withdrawal and penalty on your tax return. FSA closures do not generate tax forms because unused money is forfeited, not withdrawn.