What Is Portability?
Portability refers to an employee's option to retain certain benefits when switching employers. Some pension plans and health insurance have portability. Most 401(k) plans also have portability of benefits, as do health savings accounts (HSAs).
- Portability is the option to move certain employee benefits along with you if you change employers.
- Health insurance benefits are made portable through HIPAA legislation and COBRA continuation of coverage.
- Retirement plans are made portable through qualified rollovers into a new 401(k) or individual retirement account (IRA).
How Portability Works
Portability is a U.S. employee's legal right to maintain certain benefits when switching employers or leaving the workforce.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) details rights and protections for participants in group health plans.
HIPAA states that employer health insurance plans may not be able to exclude coverage for employees with preexisting conditions. It also provides opportunities to enroll in a group health plan if either coverage is lost or certain life events occur. The law prohibits discrimination against employees and their dependent family members based on health factors. The law assures that certain people will have access to, and can renew individual health insurance policies.
HIPAA published a report in March 2018 in which Director Roger Severino hinted there could be some 2018 changes to HIPAA. The Trump administration has communicated a tendency to decrease rather than increase federal regulation. This has the potential to translate to a reduced burden of compliance and greater information sharing among healthcare organizations.
At the same time, the Global Data Protection Regulation (GDPR) in the European Union is forcing many international companies that offer healthcare benefits to employees to tighten their policies regarding data-sharing. Now, with regards to portability, organizations must carry out lengthy audits of personal data, including determining the type, location, and purpose of the data, along with its administrator, current security measures, and ability with which individuals can access it.
In the U.S., the Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that allows eligible employees to continue their health insurance coverage for a period of time after losing a job. COBRA allows former employees, retirees, spouses, former spouses, and dependent children to retain the same health insurance coverage at group rates that otherwise would be lost with the job.
While these individuals will likely pay more for health insurance coverage through COBRA than they would have as an employee, COBRA coverage is typically less expensive than an individual health insurance plan would be.
Portability and IRA Rollovers
Portability is an important concept in an IRA rollover. Individuals with 401(k) plans can roll over into an IRA or a new company's 401(k). An IRA (or any other retirement account) rollover occurs when a person changes jobs and instructs the old company's retirement plan administrator to transfer the account balance to the new company's administrator.
The rollover process is called a direct rollover. Taxes are not owed with a direct rollover or trustee-to-trustee transfer. A trustee-to-trustee transfer is when the two financial institutions (original holder of the IRA and the new institution) make the transfer of IRA funds, and the individual doesn't receive a check.
In the case of a 60-day rollover, the funds are paid directly to the investor, who deposits some or all of the funds in another retirement plan or IRA within 60 days. However, any funds that are not rolled over within 60 days are typically taxable. If the person is younger than age 59½, there will also be early withdrawal penalties on those assets.