HSA question

[Sojourner]

I don't currently have an HSA or HDHP... Just a bronze-type plan that I purchased directly from Aetna (not through the gov't exchange). I intend to switch to an HDHP and setup an HSA as soon as possible, which I assume will be within the next few months during open enrollment. My question has to do with the possibility of having the newly setup HSA cover a large medical bill that I will be paying within the next 30-90 days. The bill stems from treatment I received earlier this year, and the provider and my current insurance company have just recently figured out all the claims and benefits, etc., so now I am finally being billed for this.

Will I be able to leverage a newly setup HSA to cover this large payment ($5K)? Does it matter that the actual incident that triggered all this medical care for which I will be paying occurred while I was on a different insurance plan? Or is it only about when I actually incur (and pay) for healthcare expenses? I have talked to the provider that is billing me the $5K and they seem open to working with me on a payment plan, so I think I should be able to delay the majority of the payments until after my new HSA is setup... assuming this makes sense and would be to my benefit.

 

[MichaelB]

When I looked into this for a friend, expenses were eligible once the HSA account was opened, even though she had not yet signed up for the HD policy.

 

[gauss]

On a quick reading of IRS Publication 969 it looks like your expenses would not qualify if was incurred before your HSA has been setup.

However, it appears that State law defines when an HSA is setup, so it is possible that your state may define this in some other way which may allow the distribution.

-gauss

For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. State law determines when an HSA is established. An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established.

If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses.

 

[ziggy29]

When I looked into this for a friend, expenses were eligible once the HSA account was opened, even though she had not yet signed up for the HD policy.

Interesting. How do you open an HSA if you don't already have a HDHP established?

 

[Sojourner]

So if I'm understanding this correctly, I could go ahead and setup my HSA somewhere, and from that point forward whatever I have to pay towards this bill would be considered an HSA-eligible expense? In other words, it's the actual payments that have to be made post HSA setup? Or does the phrase "expenses incurred before you establish your HSA" mean that it's the billing date (or even the date of treatment) that determines eligibility?

 

[ziggy29]

My understanding is that the procedure has to be performed after the HSA is established. If you see a doctor in March and you pay in May, for the purposes of an HSA the expense was incurred in March.

 

[gauss]

My understanding is that the procedure has to be performed after the HSA is established. If you see a doctor in March and you pay in May, for the purposes of an HSA the expense was incurred in March.

+1 my understanding of incurred also.

 

[Sojourner]

Thanks for all the input. Looks like I'll just have to cough up that $5K without any tax relief -- bitter pill to swallow but not much I can do about it.

 

[MichaelB]

Interesting. How do you open an HSA if you don't already have a HDHP established?

A friend of mine was in this situation. She opened the account the same month she was planning on enrolling in an HSA policy, didn't contribute anything, then had to choose another policy due to some complication. Two years later she did enroll in an HSA policy, also opened a new HSA account and made a contribution. Her CPA confirmed some of the medical expenses, for one year when she didn't itemize, were eligible for HSA withdrawal, based on the date the first, unused account was established, even though no money was ever contributed.

 

[MichaelB]

Medical expenses are deducted in the tax year they are paid, not when they are incurred. HSA expense eligibility tends to mirror IRS itemization rules, so if you set up the HSA Jan 1 and pay an eligible expense Jan 2, why would that not meet the criteria of HSA eligible withdrawal, even if the procedure was carried out a month earlier. If no HSA were involved the medical expense would be considered deductible in January.

Edit to add - I think the OP situation is a stretch in any case.

 

[gauss]

Does anyone know if the HSA custodian is responsible for verifying that the timing of the services provided is after the HSA is setup?

The custodian will obviously know when the HSA is opened and they typically, from what I have seen, receive dates of service as part of the HSA reimbursement process.

If this single example of an HSA disclosure, the first match on my google search, is representative, then you may not have a problem getting a reimbursement check issued to you. The only issue would be if it is coded as taxable or not. If taxable a 10% penalty would also apply.

One possible strategy would be to open an HSA account before the end of the year and then submit a small claim (ie $100) also before the end of the year. You would see how it all works when you receive the IRS reporting forms next January or so.
The assumption in this test is that later larger claims would be treated the same as the first small claim.

 

[kaneohe]

........................................n you may not have a problem getting a reimbursement check issued to you. The only issue would be if it is coded as taxable or not. If taxable a 10% penalty would also apply.

One possible strategy would be to open an HSA account before the end of the year and then submit a small claim (ie $100) also before the end of the year. You would see how it all works when you receive the IRS reporting forms next January or so.
The assumption in this test is that later larger claims would be treated the same as the first small claim.

The penalty for a non-qualified distribution is 20%. From Pub. 969

"If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. You may have to pay an additional 20% tax on your taxable distribution."

There are 2 assumptions in your strategy:
1) Custodian will treat large distributions the same as small distributions.
2) IRS will treat large distributions the same as small distributions.

I think custodians probably do not wish to be the nanny middleman. Even if they did, the system would be leaky since you can write a check from the HSA account to yourself (at least for the 3 HSAs I have had). Under those conditions , it is impossible for custodians to code 1099s correctly and the game is solely between the taxpayer and IRS.

 

[gauss]

Thanks for the correction. The penalty has indeed been upped to 20%.

Also when the original HSA concepts were introduced into law , I recall a design philosophy of HSA custodians not being required to be gatekeepers in contrast to prior tax-advantaged health care savings plans. I am not sure if this philosophy has held up over the years or not.