HSA's - What if expenses are greater than account balance?

[porcelain]

I have a question about HSA accounts:

Imagine a scenario where I contribute $500 to a new HSA in February 2009 and then pay $1,500 in medical bills in July 2009 with money from a regular checking account. At the end of the year (December 2009) I contribute $2,000 to my HSA.

I now have $2,500 in my HSA. At the end of 2009, can I make a $1,500 distribution from my HSA to reimburse myself for my medical payments in June? Can I make this distribution tax-free with no penalties?

Can somebody please explain the underlying principles at work here?

Another way of asking my question is: Are distributions related to contributions? What are the time limitations between the two?

Thank you.

 

[ChrisC]

I have a question about HSA accounts:

Imagine a scenario where I contribute $500 to a new HSA in February 2009 and then pay $1,500 in medical bills in July 2009 with money from a regular checking account. At the end of the year (December 2009) I contribute $2,000 to my HSA.

I now have $2,500 in my HSA. At the end of 2009, can I make a $1,500 distribution from my HSA to reimburse myself for my medical payments in June? Can I make this distribution tax-free with no penalties?

Can somebody please explain the underlying principles at work here?

Another way of asking my question is: Are distributions related to contributions? What are the time limitations between the two?

Thank you.

Yes and yes (assuming the reimbursement is for eligible medical expenses). Don't really understand what you're getting at here, but I think the simple answer is that you can only distribute from your account up to the amount that's in your account (which could include contributions and income in the account). Payments/distributions from the HSA for eligible medical expenses have no taxable income consequence; i.e the amount you've contributed (which was a pre-tax contribution or a tax deductible contribution) and income earned on that amount is essentially not included in any taxable income; it's sheltered from tax liability. You get an added benefit if you attain 65 years old, in that the HSA can be used for nonmedical purposes but income thereof used for nonmedical purposes gets taxed as oridinary income.

Right now, there are no time limitations related to contributions and distributions, but that feature of the plan can always be changed by the Gummint. So, a common strategy is to defer payment of all eligible medical expenses from the HSA (if you can afford to fund the expenses from taxable accounts) and in later years, cash out accordingly for tax planning purposes -- it could represent a source of tax free income. I'm working that plan now and I believe others are doing that too.

I suppose someone who can write better in plain English could break it down better for you. I tend to be verbose.

 

[porcelain]

... Don't really understand what you're getting at here...

Thanks for your reply Chris. I think I'm the one having a hard time putting my question in plain English. Let me try asking my question again with the this made-up scenario:

• I have $100 in my HSA account today
• I go to the doctor later today and spend $800 on medical expenses out-of-pocket while at the doctors office
• I have no other medical expenses and no HSA activity (ignore investment gains for the sake of this scenario) until.......

1. A few months later, can I contribute $700 to my HSA, and then immediately take an $800 distribution money? Is this within the rules of an HSA?
2. Alternatively, could I wait five years, then contribute $700 to my HSA, and then immediately take an $800 distribution?

Thanks.

 

[REWahoo]

1. A few months later, can I contribute $700 to my HSA, and then immediately take an $800 distribution money? Is this within the rules of an HSA?
2. Alternatively, could I wait five years, then contribute $700 to my HSA, and then immediately take an $800 distribution?

I have a HSA and as I understand the rules, the answer to both your questions is yes.

HSA withdrawals are based on qualified medical expenses, not on timing of deposits. There is no requirement the money be on deposit in your HSA account prior to incurring the expense, only that the money be in the account to withdraw.

Remember that you have a maximum annual HSA contribution limit. In #2 above, you couldn't make the max contribution to your HSA account in year 5, then contribute an additional $800, even if you had contributed less than the maximum to your account in the year you incurred the $800 expense.

To withdraw from my HSA I fill out a request form saying how much I would like to withdraw and send it to the custodian, who sends me a check. My HSA custodian requires no justification of qualified expenses, that's between me and the IRS. So, I need to have receipts to show the IRS in the event I'm audited. Pretty simple and straightforward.

 

[Darryl]

As ChrisC and ReWahoo said it's all yes'

The HSA custodial role seems much easier to work with than some FSA encounters I've had to deal with. With the HSA it's just on you to keep your receipts so if audited you can prove the money went for qualified medical expenses.

I also pay some straight out of pocket to help the balance in my account grow and leave my money sheltered. The plan went terribly off course last year as all the investment losses in the account are sheltered, better I would have had the money in taxable and been able to claim the loss. Fortunately it's not a lot of money (yet) and I have a very conservative mix in this account for exactly this reason.

 

[ziggy29]

I also pay some straight out of pocket to help the balance in my account grow and leave my money sheltered. The plan went terribly off course last year as all the investment losses in the account are sheltered, better I would have had the money in taxable and been able to claim the loss. Fortunately it's not a lot of money (yet) and I have a very conservative mix in this account for exactly this reason.

Mine is still all in cash earning a whopping 0.24% last month.

My current plan is to keep cash for at least two years of out of pocket maximums, maybe three ($4K per year), in cash at all times and I may invest the rest in something like a balanced fund.

 

[travelover]

I had an HSA through Wageworks which was initially set up by my ex employer. Getting reimbursed was a PITA and they took forever to correct stupid mistakes. I dropped them and went with Patelco Credit Union. With Patelco, I just write myself a check when I need to reimburse myself, all record keeping is my responsibility, which is great, as a simple spread sheet does it for me. They don't pay much interest, but I'm not using it as a way to shelter investments, just to offset income taxes with medical expenses. So as I generate medical expenses, I just feed more cash through Patelco and reimburse myself.

 

[kaneohe]

porcelain.........yours is a good question. My gut feeling, as others have also pointed out, is that it is ok as long as the HSA was started before the medical procedure was done (not billed). Having said that, it doesn't sound like a very reliable answer unless someone cites some quote from some IRS publication or code which I can't. You might try fairmark.com or bogleheads.org.

I've seen a lot of stuff about just accumulating the funds in the HSA and then making distributions many yrs later but that almost never addresses the timing issue that is your concern.

 

[REWahoo]

... it doesn't sound like a very reliable answer unless someone cites some quote from some IRS publication or code which I can't.

U.S. Treasury - Health Savings Accounts (HSAs)

Download the "All About HSAs" PDF.

On page 25: HSA Distributions - "Qualified medical expense must be incurred on or after the HSA was established."

On page 30: HSA Distributions - "Qualified medical expense must be incurred on or after the HSA was established. No time limit on when distribution must occur."

 

[kaneohe]

REW...thanks for the cite. I agree that those cites do not specifically restrict OP's case but they don't specifically permit them either...which might be the best we can hope for.
I can't know what the writers were thinking but they might have been thinking about (perhaps the more commonly imagined scenario) the case where you build your HSA stash up for years and then start withdrawing but always the buildup is ahead of the underlying expenses.

There may be possibly some relation to FSAs where the account is perishable after one yr or so. I know in those accounts you can draw out ahead of the buildup. Typically you deposit a fixed amount via your periodic paychecks but you could be reimbursed more than is in the account (up to your annual maximum planned contribution)......and I believe if you leave the company early in the yr, you don't have to pay them back for the excess distributions (excess over your contributions). But that is FSAs, not HSAs.

 

[porcelain]

ah ha!

Thanks for the reference REWahoo. The full text of page 30 is as follows:

HSA Distributions can be used to reimburse prior years’ expenses as long as they were incurred on or after the date the HSA was established.

• No time limit on when distribution must occur
• Individual must keep records sufficient to prove that:

1. the expenses were incurred,
2. they were not paid for or reimbursed by another source or taken as an itemized deduction

This seems pretty definitive. I would be allowed to "wait five years, then contribute $700 to my HSA, and then immediately take an $800 distribution?" in my prior scenario.

Does anybody interpret this differently?

 

[kaneohe]

2. ..... another source.......... that doesn't include your taxable assets?

Seems like this could be interpreted to mean you couldn't pay from taxable assets and then reimburse yourself although everything else I've read suggests you can. Perhaps the danger in reading things out of context?

 

[Darryl]

Not much danger. You can pay yourself 20 years from now if you want to.

 

[free4now]

I also like the freedom to do all the recordkeeping myself with patelco. I also just use a spreadsheet. If I forget to use my HSA checkbook for a particular expense, I just write myself a check from the HSA account later and record it in my spreadsheet. So I'm already doing the behavior the OP asked about.

The $1/month after the first year fee stunned me when it started up, but I think it's well worth it for the convenience, and decent interest rate.