For the wiki: HSA as an emergency fund

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LinusP
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For the wiki: HSA as an emergency fund

Post by LinusP » Fri Jun 14, 2019 12:54 pm

The Bogleheads wiki Emergency Fund page has a section for 'Roth IRA as an emergency fund' that I feel is pretty balanced on the pros and cons. I noticed the absence, though, of a similar section for using an HSA as source of emergency funds, so I submitted wiki feedback. In a brief back-and-forth with LadyGeek, she suggested I tap into the wisdom of the broader forum to craft this new section.

Here's my first crack at some wording - please chime in to correct errors, wordsmith, rewrite from scratch...anything to make it better:
HSA as an emergency fund
A Health savings account can be used to pay for unexpected medical expenses tax-free, as long as they are qualified (see IRS Publication 502, Medical and Dental Expenses). Normally, non-medical (and unqualified medical) distributions from an HSA would be taxed as income and assessed an additional 20% penalty. However, if medical expenses are qualified, incurred since the establishment of the HSA, paid out of pocket, and appropriately documented, they can be reimbursed in a future year (see Q39 in IRS Notice 2004-33). So a running tally of reimbursable expenses can be kept, allowing tax-free withdrawals along the same lines as Roth IRA contributions.

Note that this strategy puts the shorter-term need for liquid, low-risk emergency funds in opposition to the longer-term tax savings of appreciated assets in the HSA. If only part of the HSA is considered part of the emergency fund, the two parts (emergency fund and long-term growth) of the HSA should have different asset allocations and be carefully tracked. As with using Roth IRA contributions for emergencies, any withdrawals would permanently reduce tax-advantaged 'space'. For that reason, and because HSA funds might not be available as quickly as bank accounts, HSA funds should probably only be considered a 'later tier' of the total Emergency Fund.
For reference, here are some other threads on this topic: Whether you're an HSA expert correcting an error or a newbie that's confused about this, I'd appreciate hearing from you.
Last edited by LinusP on Fri Jun 14, 2019 1:39 pm, edited 2 times in total.

pastabatman
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Re: For the wiki: HSA as an emergency fund

Post by pastabatman » Fri Jun 14, 2019 1:14 pm

Separate allocations should be carefully tracked for the emergency fund and long-term growth portions of the HSA.
By tracking 'separate allocations', do you mean tracking the medical expenditures that have not yet been claimed from the HSA? It might be helpful to explain exactly what sort of tracking is necessary (e.g., keeping unclaimed medical bill in a folder).

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LinusP
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Re: For the wiki: HSA as an emergency fund

Post by LinusP » Fri Jun 14, 2019 1:44 pm

pastabatman wrote:
Fri Jun 14, 2019 1:14 pm
Separate allocations should be carefully tracked for the emergency fund and long-term growth portions of the HSA.
By tracking 'separate allocations', do you mean tracking the medical expenditures that have not yet been claimed from the HSA? It might be helpful to explain exactly what sort of tracking is necessary (e.g., keeping unclaimed medical bill in a folder).
No, I meant if only part of the HSA is slated for the emergency fund, that needs to be tracked separately from the part for long-term growth. I edited the quoted section in my original post for more clarity.

I agree that it would help to spell out some of the documentation requirements. That should probably be on the Health savings account page under Paying current expenses out of pocket, but we could link to it from the new section. I'll see what I can dig up.
Last edited by LinusP on Fri Jun 14, 2019 2:08 pm, edited 1 time in total.

klaus14
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Re: For the wiki: HSA as an emergency fund

Post by klaus14 » Fri Jun 14, 2019 2:01 pm

HSA can already be used for medical emergencies. So in that sense very good idea to keep money there for medical expenses. But keeping all the old receipts is too complex.

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Re: For the wiki: HSA as an emergency fund

Post by airborne » Fri Jun 14, 2019 5:37 pm

I pay out of pocket for current medical expenses, scan/file receipts and keep track of the total amount of HSA funds I may withdraw tax free. This amount is figured into my emergency fund. Anytime I pay a medical expense, I view it as a deposit into my EF.

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LinusP
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Re: For the wiki: HSA as an emergency fund

Post by LinusP » Fri Jun 14, 2019 5:56 pm

airborne wrote:
Fri Jun 14, 2019 5:37 pm
I pay out of pocket for current medical expenses, scan/file receipts and keep track of the total amount of HSA funds I may withdraw tax free. This amount is figured into my emergency fund. Anytime I pay a medical expense, I view it as a deposit into my EF.
Does that mean your emergency fund is still growing to the size you'd like it to be, or do you view the 'reimbursable HSA funds' as a 'later tier' of your emergency fund that can be accessed without penalty/capital gains? Did my wording for the wiki section work for you?

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Re: For the wiki: HSA as an emergency fund

Post by Nate79 » Fri Jun 14, 2019 8:15 pm

I agree with the basic idea of the OP. We keep our medical insurance deductible in the cash portion of the HSA as a medical emergency fund and keep receipts and pay out of pocket for all medical expenses. Those receipts are a universal emergency fund of second tier (behind cash). But this money is invested in stock index funds so I discount their value by 50% in case they are needed during a crash.

Since medical emergencies are a major type of emergency I think the HSA can be an effective secondary emergency fund.

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Re: For the wiki: HSA as an emergency fund

Post by willthrill81 » Fri Jun 14, 2019 9:44 pm

klaus14 wrote:
Fri Jun 14, 2019 2:01 pm
HSA can already be used for medical emergencies. So in that sense very good idea to keep money there for medical expenses. But keeping all the old receipts is too complex.
There is software out there that can keep track of these receipts for you, but it's really not difficult to just scan the receipts and save them for later.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: For the wiki: HSA as an emergency fund

Post by fortfun » Fri Jun 14, 2019 10:09 pm

willthrill81 wrote:
Fri Jun 14, 2019 9:44 pm
klaus14 wrote:
Fri Jun 14, 2019 2:01 pm
HSA can already be used for medical emergencies. So in that sense very good idea to keep money there for medical expenses. But keeping all the old receipts is too complex.
There is software out there that can keep track of these receipts for you, but it's really not difficult to just scan the receipts and save them for later.
Your doctor's office and pharmacy can also produce those records (at least ours can).

RandalThor
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Re: For the wiki: HSA as an emergency fund

Post by RandalThor » Fri Jun 14, 2019 10:27 pm

I know the HSA accounts at Optum allow you to load your receipts for the expenses you have incurred. You can leave them there w/o being reimbursed and wait until a later time to do so.

My guess is other HSA administrators offer something similar.

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teen persuasion
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Re: For the wiki: HSA as an emergency fund

Post by teen persuasion » Sat Jun 15, 2019 9:09 am

This might muddy the waters a bit, but the idea of paying medical expenses OOP and leaving your reimbursements inside the HSA as EF is very useful when filing the FAFSA.

There is an Asset Protection amount on the FAFSA, that is subtracted from taxable assets before the Available Assets are calculated. In the recent past, it was large enough to shield a decent size EF ($40k ish in 2008). Now that protection amount has shrunk to $12k ish (it is age rated, rising as parent's age increases - and we are 10+ years older!). So now even a modest EF gets included in Available Assets, driving up the EFC. Shielding your EF by keeping it inside your HSA is thus preferable to reimbursing from the HSA and keeping it in a standalone EF.

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Re: For the wiki: HSA as an emergency fund

Post by willthrill81 » Sat Jun 15, 2019 9:38 am

teen persuasion wrote:
Sat Jun 15, 2019 9:09 am
This might muddy the waters a bit, but the idea of paying medical expenses OOP and leaving your reimbursements inside the HSA as EF is very useful when filing the FAFSA.

There is an Asset Protection amount on the FAFSA, that is subtracted from taxable assets before the Available Assets are calculated. In the recent past, it was large enough to shield a decent size EF ($40k ish in 2008). Now that protection amount has shrunk to $12k ish (it is age rated, rising as parent's age increases - and we are 10+ years older!). So now even a modest EF gets included in Available Assets, driving up the EFC. Shielding your EF by keeping it inside your HSA is thus preferable to reimbursing from the HSA and keeping it in a standalone EF.
I've not heard of that point before. Thanks!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: For the wiki: HSA as an emergency fund

Post by grabiner » Sun Jun 16, 2019 4:23 pm

teen persuasion wrote:
Sat Jun 15, 2019 9:09 am
This might muddy the waters a bit, but the idea of paying medical expenses OOP and leaving your reimbursements inside the HSA as EF is very useful when filing the FAFSA.

There is an Asset Protection amount on the FAFSA, that is subtracted from taxable assets before the Available Assets are calculated. In the recent past, it was large enough to shield a decent size EF ($40k ish in 2008). Now that protection amount has shrunk to $12k ish (it is age rated, rising as parent's age increases - and we are 10+ years older!). So now even a modest EF gets included in Available Assets, driving up the EFC. Shielding your EF by keeping it inside your HSA is thus preferable to reimbursing from the HSA and keeping it in a standalone EF.
I believe this has another advantage over having the emergency fund in a Roth IRA. If you withdraw from a Roth IRA in an emergency, this is considered income for FAFSA purposes. If you withdraw from an HSA, that should not be considered income, because the formula cannot tell whether you used it for current medical expenses (which should not be income).
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teen persuasion
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Re: For the wiki: HSA as an emergency fund

Post by teen persuasion » Mon Jun 17, 2019 7:26 am

grabiner wrote:
Sun Jun 16, 2019 4:23 pm
teen persuasion wrote:
Sat Jun 15, 2019 9:09 am
This might muddy the waters a bit, but the idea of paying medical expenses OOP and leaving your reimbursements inside the HSA as EF is very useful when filing the FAFSA.

There is an Asset Protection amount on the FAFSA, that is subtracted from taxable assets before the Available Assets are calculated. In the recent past, it was large enough to shield a decent size EF ($40k ish in 2008). Now that protection amount has shrunk to $12k ish (it is age rated, rising as parent's age increases - and we are 10+ years older!). So now even a modest EF gets included in Available Assets, driving up the EFC. Shielding your EF by keeping it inside your HSA is thus preferable to reimbursing from the HSA and keeping it in a standalone EF.
I believe this has another advantage over having the emergency fund in a Roth IRA. If you withdraw from a Roth IRA in an emergency, this is considered income for FAFSA purposes. If you withdraw from an HSA, that should not be considered income, because the formula cannot tell whether you used it for current medical expenses (which should not be income).
Good point!

As far as I can see, the only point where HSAs affect FAFSA calculations is if you take a deduction for HSA contributions on form 1040 (i.e., not thru payroll deductions) - then you have to add back the HSA deduction. But I saw no mention of HSA reimbursement withdrawals.

The FAFSA inclusion of tax free income like Roth IRA withdrawals has us watching our timing of starting a Roth ladder when our youngest is expected to be in college. In the past, we could have planned to qualify for the auto EFC = 0 by keeping our AGI below the cutoff (and avoid the calculations entirely), but there have been too many fluctuations in the thresholds in recent years, usually reductions! That retroactive drop several years ago from $32k to $23k was a big gap.

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teen persuasion
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Re: For the wiki: HSA as an emergency fund

Post by teen persuasion » Mon Jun 17, 2019 8:47 am

Another pro to using the HSA as EF is if you could be eligible for EITC. Exceeding the investment income cliff of $3500 could make you completely ineligible for EITC. Max EITC was $6431 for 2018. Keeping that income inside the HSA makes it invisible, vs a standalone taxable EF.

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Re: For the wiki: HSA as an emergency fund

Post by overthought » Mon Jun 17, 2019 3:39 pm

Perhaps worth pointing out: Medical expenses are one of the biggest risks an EF has to account for -- at least in my case. I can tighten the belt an awful lot and get living expenses down, but medical costs even with full insurance coverage could easily peak above $30k in a year with premiums, deductibles, copays, and OOP max (and that's before we even start talking about hitting policy limits, which I would assume is Game Over -- aka Chapter 7 -- for most mortals). It's a natural fit to keep that part in my HSA.

Plus, HSA can reimburse health insurance premiums if you're on COBRA and/or receiving unemployment benefits, further cushioning a job loss scenario.

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