Interesting HSA Distribution Rule

[justin]

Time to revive an old thread. Here's a hypothetical that has been bugging me: Let's say I open HSA 1 through my employer at Aetna. A year later, I open up HSA 2 at my local bank. I'm making contributions to each account which add up to the total allowable amount each year. I max out the contributions for 10 years. Then I roll all HSA's over into HSA 3 at a different custodian. Over all these years I've been saving receipts for med expenses. After HSA 1 and 2 are closed, can I withdraw from HSA 3 to reimburse myself tax-free for all amounts incurred since HSA 1 was opened? Or am I limited to reimbursing amounts (tax-free) for expenses incurred only since HSA 3 was opened?

I like the idea of keeping receipts for 30 years, then withdrawing tax-free for all med expenses incurred over that time period, but I'm worried that changing custodians and rolling over HSA's over time may extinguish the right to reimbursement for accounts that are rolled over and closed.

Another issue is what happens if the account owner dies? If I've got $100000 in my HSA account in 30 years with a suitcase full of receipts totaling $100000, could my estate withdraw the full $100,000 tax-free and have it pass to heirs as cash (after tax money to the heirs)?

[kramer]

Justin,

I like the idea of keeping receipts for 30 years, then withdrawing tax-free for all med expenses incurred over that time period, but I'm worried that changing custodians and rolling over HSA's over time may extinguish the right to reimbursement for accounts that are rolled over and closed.

Yes, you can withdraw funds later no matter how many HSA custodians you have had. Remember, your HSA custodian is not really a "gatekeeper" demanding receipts to justifiy withdrawals. They just give you your money when you ask for it (you request it by writing a check, using a debit card, etc.). To them, it is really like a checking account except that they have some simple annual reporting requirements on deposits and withdrawals to the IRS on the account.

Whether you pay taxes on the withdrawals is between you and the IRS and nothing to do with your custodian. You would make this decision when you filed taxes for that year. The only time you would need to show receipts is if you got audited. It really is quite simple.

Be sure to backup all of your long term receipts electronically by scanning them in in case of fire or loss.

I will be opening my HSA next month. So if I learn anything else I will be sure to share it.

Kramer

[justin]

Originally Posted by kramer

Yes, you can withdraw funds later no matter how many HSA custodians you have had. Remember, your HSA custodian is not really a "gatekeeper" demanding receipts to justifiy withdrawals. They just give you your money when you ask for it (you request it by writing a check, using a debit card, etc.). To them, it is really like a checking account except that they have some simple annual reporting requirements on deposits and withdrawals to the IRS on the account.

Whether you pay taxes on the withdrawals is between you and the IRS and nothing to do with your custodian. You would make this decision when you filed taxes for that year. The only time you would need to show receipts is if you got audited. It really is quite simple.

The part that concerns me is that the IRS regs state that, basically, you have to have the "account" opened at the time the expense was incurred. The issue is whether a reimbursement is tax-free for an expense incurred BEFORE your current HSA account was opened, but the expense was incurred AFTER a previous HSA was opened, when the funds from the earlier HSA were transferred to the HSA opened later.

Let's say I contribute to my credit union HSA in 2007 and 2008 and incur expenses in 2007 and 2008. In 2009, I roll over the credit union HSA to hsadministrators.com. I know I can reimburse myself tax-free for expenses incurred in 2009 from my hsaadministrators HSA account. But can I reimburse myself tax-free for expenses incurred in 2007 and 2008 (time periods prior to the opening of my current account)?

[TromboneAl]

prove that the expense was not reimbursed by another source or taken as an itemized deduction on your tax return.

How do you prove that it wasn't reimbursed from another source? For example, if I spend $70 for eyeglasses, how do I prove that wasn't paid for by insurance?

BTW, I got a free app to simplify scanning at www.DocsVault.com. Seems to work pretty well so far.

There certainly is a risk that in the course of 10 or 20 years you'll lose those receipts (fire, etc.). By scanning and backing up (with offsite backups), I'll at least reduce that chance.

[Martha]

My favorite HSA "cheat sheet" is from the treasury department here: http://www.ustreas.gov/offices/publi...SAs_040507.pdf

This says if the recipient on death of the account holder is not the holder's spouse, then the account is no longer treated as an HSA. The funds in the account are subject to income tax except for qualified medical expenses of the deceased paid by the recipient. This language is still a bit vague--can the recipient reimburse for expenses previously paid by the decedent? It doesn't quite sound that way, but heck, this is just a brochure, not the law.

So the short answer is I don't know.

[Martha]

Here is the IRS HSA publication which also talks about how an HSA is treated after death:

http://www.treas.gov/offices/public-affairs/hsa/

Too lazy tonight to read the statute or regs.

[mykidslovedogs]

Here is another handy guide that we like to give to our clients. It might answer some of your questions. # 6 on page 11 might clear up your question about withdrawls after rolling money into a 3rd HSA account.

[justin]

Originally Posted by mykidslovedogs

Here is another handy guide that we like to give to our clients. It might answer some of your questions. # 6 on page 11 might clear up your question about withdrawls after rolling money into a 3rd HSA account.

Sounds like #6 says I can rollover my account all I want and still withdraw all amounts previously incurred.

Looks like 26 USC 223 that martha linked to says that my estate can't take a huge reimbursement from my account after my death for any amounts except those expenses paid by a beneficiary of my HSA within 1 yr of my death. So maybe the final hospital bills leading up to my death, but not the 30 years of previous expenses covered by my hypothetical case-of-receipts.

For tax planning, it may make sense in some cases to take a reimbursement of all amounts eligible once you get "old" and your mortality risk increases. Otherwise your HSA may be treated as income to your beneficiaries (if your spouse isn't the beneficiary).

[Martha]

That is how I read it too Justin. At least there is no 10% penalty. But your estate may end up owing both estate taxes and income taxes on the money.

I agree with MKLDs that the change in trustee shouldn't matter.