Building an HSA account

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Building an HSA account

Postby jdilla1107 » Sat Feb 09, 2013 7:36 pm

My employer is newly offering an HSA with high deductible plan and it's a great deal. The very informative Bogleheads Wiki talks about paying the expenses out of pocket to let the HSA grow each year. I want to do this.

The idea is that I am going to keep 20+ years of receipts to draw later tax free, right? Is this 100% legit or is it some goofy unintended side effect thing? Where could I find the source material for this process? (I have been searching quite a bit) The process seems pretty odd, so I want to double check all of this.

I asked the benefits administrator about this at my work and they only gave a puzzled look.

Thanks for any pointers.
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Re: Building an HSA account

Postby JD » Sat Feb 09, 2013 7:59 pm

Anything that I don't 100% understand, I will not invest in.Not familiar with HSA and someone will probably give you a better answer! But, I will max 401k/403b, TIRA, Roth, etc before thinking about HSA.
If the administrator won't answer your question you probably have to walk away or run..
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Re: Building an HSA account

Postby porcupine » Sat Feb 09, 2013 8:27 pm

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Re: Building an HSA account

Postby tainted-meat » Sat Feb 09, 2013 8:34 pm

JD wrote:Anything that I don't 100% understand, I will not invest in.Not familiar with HSA and someone will probably give you a better answer! But, I will max 401k/403b, TIRA, Roth, etc before thinking about HSA.
If the administrator won't answer your question you probably have to walk away or run..


Huh? Having an HSA is a great deal. FICA taxes are not paid on HSA contributions as long as funds are taken directly from the paycheck. Withdrawals can be made at age 65 for reason other than medical expenses without penalty (although income tax would be owed). If used for health expenses, tax is never paid on the contributions or earnings.

I'd recommend contributing to the HSA first if you are unable to max out all retirement accounts.
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Re: Building an HSA account

Postby jdilla1107 » Sat Feb 09, 2013 8:44 pm

I max everything I can and am high net worth. My question was only specifically regarding where I can read in more detail about what I need to do for the next 20 years. Like, I wanted to read the IRS publication which would state that this is a valid strategy. (I must not be searching in the right places) I personally think people push it a bit on this forum. (eg: Debates about not doing pro-rata on an after tax 401k rollover.)

Like, I don't see it (obviously stated at at least) here:

http://www.irs.gov/publications/p969/ar02.html#d0e1436
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Re: Building an HSA account

Postby kaneohe » Sat Feb 09, 2013 9:09 pm

here's something from the fairmark.com forum

the answer is from the same Alan S. on this forum

http://fairmark.com/forum/read.php?4,24169

he can probably find you some IRS links.

Some practical 20 year storage issues: paper can fade/get lost or destroyed so you might want to scan and backup.
How will you prove you didn't use those expenses for medical deductions? You might need 20 yrs worth of tax returns too.

Perhaps using old medical bills is permitted because it is not specifically prohibited? Pub 969 does say you don't have to distribute every yr
and also that you can claim for expenses incurred after you set up the HSA...... was the ability to file for years old expenses expressly planned or was this some creative person seeing a loophole that nobody has bothered to close?
Last edited by kaneohe on Sat Feb 09, 2013 9:25 pm, edited 1 time in total.
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Re: Building an HSA account

Postby texasdiver » Sat Feb 09, 2013 9:22 pm

It sounds as if your main discomfort is with the time delay from when the medical expense is incurred and when the expense is reimbursed from the HSA.

If you read the IRS document that you cited, you will find that you have the option of (1) paying medical expenses directly from the HSA, usually with a check or debit card from the HSA account, or (2) reimbursing yourself from the HSA for qualifying expenses that have already occurred. Because the IRS has not set any time deadline for reimbursement people are setting aside receipts and doing the reimbursement years later for other purposes.

I don't think you will find any specific IRS document affirmatively saying that it is OK to do this. However there are plenty of HSA-related web sites that mention the strategy so it is obviously common. Google search "deadline for reimbursement from HSA" and you'll find a lot of links including these:


http://www.medplanaccess.com/hsa/hsa_distributions.htm
http://www.hsabenefitsconsulting.com/ho ... -your-hsa/
http://www.hsaeducator.com/using-your-hsa/
http://timothyfinancial.com/news/2010/0 ... g-account/
http://www.flex125.com/services/health-savings-accounts

They all say exactly the same thing. That there is no deadline for reimbursing yourself for qualifying expenses from your HSA.
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Re: Building an HSA account

Postby jdilla1107 » Sat Feb 09, 2013 9:47 pm

Thank you.
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Re: Building an HSA account

Postby tfb » Sat Feb 09, 2013 9:54 pm

kaneohe wrote:was the ability to file for years old expenses expressly planned or was this some creative person seeing a loophole that nobody has bothered to close?

I say the latter. I for one will not accumulate old receipts. I'm planning to make a clean break every year and self-reimburse eligible expenses shortly after the end of the year. Last year I had $300 worth of expenses on 13 receipts. I'm not going to carry these 13 receipts for 20 years only for the sake of tax deferral on $300.
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Re: Building an HSA account

Postby jared » Sat Feb 09, 2013 11:23 pm

jdilla1107 wrote:The idea is that I am going to keep 20+ years of receipts to draw later tax free, right? Is this 100% legit or is it some goofy unintended side effect thing? Where could I find the source material for this process? (I have been searching quite a bit) The process seems pretty odd, so I want to double check all of this.

jdilla1107 wrote:My question was only specifically regarding where I can read in more detail about what I need to do for the next 20 years. Like, I wanted to read the IRS publication which would state that this is a valid strategy. (I must not be searching in the right places)

texasdiver wrote:I don't think you will find any specific IRS document affirmatively saying that it is OK to do this.


The authority for this strategy is in IRS Notice 2004-50 (http://www.irs.gov/irb/2004-33_IRB/ar08.html)
Q-39. When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year?

A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary's gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. See Notice 2004-2, Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA.


Example. An eligible individual contributes $1,000 to an HSA in 2004. On December 1, 2004, the individual incurs a $1,500 qualified medical expense and has a balance in his HSA of $1,025. On January 3, 2005, the individual contributes another $1,000 to the HSA, bringing the balance in the HSA to $2,025. In June, 2005, the individual receives a distribution of $1,500 to reimburse him for the $1,500 medical expense incurred in 2004. The individual can show that the $1,500 HSA distribution in 2005 is a reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed and has not been taken as an itemized deduction. The distribution is excludable from the account beneficiary's gross income.
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Re: Building an HSA account

Postby jdilla1107 » Sat Feb 09, 2013 11:47 pm

Fantastic. Thank you.
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Re: Building an HSA account

Postby umfundi » Sun Feb 10, 2013 12:14 am

jdilla,

HSA funds going in are tax deductible, like a traditional IRA.

Funds coming out are tax free, like a Roth IRA, if used for medical expenses.

And, it seems, you can defer reimbursement of those medical expenses forever!

My HSA is not a huge amount. I do not keep track of my unreimbursed medical expenses. I think I will easily be able to use up my future HSA balance with then current medical expenses.

Keith
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Re: Building an HSA account

Postby camaro327 » Sun Feb 10, 2013 8:52 am

tfb wrote:I say the latter. I for one will not accumulate old receipts. I'm planning to make a clean break every year and self-reimburse eligible expenses shortly after the end of the year. Last year I had $300 worth of expenses on 13 receipts. I'm not going to carry these 13 receipts for 20 years only for the sake of tax deferral on $300.


I agree with this with a slight twist. I had about $700 worth of bills a couple years back. I used the HSA for all bills over $100 or so. I didn't reimburse the small $15, $40, you name the small amount stuff. The tax savings on the small bills and documentation is a pain.

The wiki on HSAs suggest using the HSA for medical expenses if you are not maxing your 401k and IRA.
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