HSA withdrawal basic question

[Katsmeow]

ELI5*

I know very little about HSAs. I have what I hope is a simple question. One of my kids has an HSA from a prior job. She has never withdrawn money from it. There is no HSA debit card. She doesn't even know how to withdraw money from it but I assume there is some way to do it.

I know that the withdrawal is taxable and has a penalty unless she uses it for medical expenses. She intends to use it for that purpose! She and I are unclear on the process.

I looked it up and think it may be this. But if it isn't please correct me. In this case she is going to incur the expense before she withdraws the HSA funds.

1. Incurs medical expense
2. Keeps the documentation (bill, receipt) showing the expense and how much she paid
3. Withdraw enough money from the HSA to reimburse her for expense.
4. The HSA custodian will report the withdrawal to the IRS and the IRS will assume it is taxable and not for medical expenses unless she .......
5. This is where it gets hazy. Is there a form she has to file with her taxes saying she used it for medical expenses? How does she convey to the IRS that she did use it for medical expenses.
6. She keeps her documentation in case she hears from the IRS wanting more information.

*Explain this to me like I'm 5 cause on this topic I might as well be.

 

[SecondCor521]

She can contact the HSA custodian and request the distribution.

The HSA custodian will report the distribution to the IRS on a Form 1099-SA. They will also send the same Form 1099-SA to your daughter in January.

When she prepares her tax return, she will complete Form 8889. Her HSA distribution amount should show up on line 14a. She'll put the same number on line 15, and put a $0 on line 16. The Form 8889 should be included with her tax return.

She should save the receipts and EOB with her tax records for that year. It is unlikely she will hear from the IRS.

 

[scfr]

Has your daughter called the HSA provider to ask about getting a debit card or checks? That is what I would do first if I were in her shoes.

 

[Midpack]

Has your daughter called the HSA provider to ask about getting a debit card or checks? That is what I would do first if I were in her shoes.

+1. My HealthEquity HSA came with a debit card. All I had to do to use my HSA funds was use the debit card, or enter the numbers for online payment. Very straightforward.

 

[sengsational]

HSA process is simple. Take out money at whatever level you feel like. Save all of your medical receipts in a shoe box. Put $0 on the 8889 every year. Hope you don't get audited. If you do, hand the shoe box to a tax attorney. You did the best you could, so there shouldn't be any jail time

 

[RunningBum]

HSA process is simple. Take out money at whatever level you feel like. Save all of your medical receipts in a shoe box. Put $0 on the 8889 every year. Hope you don't get audited. If you do, hand the shoe box to a tax attorney. You did the best you could, so there shouldn't be any jail time

Or you could do it correctly like SecondCor521 outlined a few posts above.

 

[qwerty3656]

She should roll it over to one of the brokerage accounts like Fidelity. Once there she has total control on how it's invested and full access to it.

 

[Katsmeow]

Thanks, everyone especially SecondCor501 which gave an explanation very suitable for an almost 5 year old.

Her HSA is with a prior employer is not a lot of money so getting the distribution probably works best.

 

[Phroig]

Your daughter should be able to link her bank account, and have the distribution sent there.
If she doesn’t need the money, I second the recommendation to open a Fidelity HSA and transfer the money there even if the balance isn’t significant. The growth is tax-free, she can take a distribution when she needs the funds, and having the account may motivate her to continue making contributions assuming she has a qualifying health plan.

 

[Katsmeow]

Good idea about linking the bank account.