Health Savings Accounts (HSAs) - Triple Tax Free Retirement Savings

Health Savings Accounts (HSAs) - Triple Tax Free Retirement Savings
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#1

Many here already know about the benefits of HSAs. For those with the wherewithal, these vehicles allow you to contribute annually up to $3,400 (single) or $6,750 (family) each year as long as you participate in a high-deductible health plan (HDHP).

If you can pay for your day to day medical care out of pocket, you can leave the balances in your HSA forever, compounding your growth throughout the decades. All you must do is keep a file showing your expenses over the years showing your incurred expenses.

The triple tax free comes in as follows: Contributions are tax free. Earnings grow tax free. Withdrawals are tax free so long as you have expenses sufficient to cover the withdrawal.

This thread is meant for a continuing discussion on low cost investment options for HSAs.

My employer offers Healthequity. I pay $30 per year for the account, plus 40bp for the option to invest in various Vanguard options.

In the past, others have offered up Bank of America, Saturna, SelectAccount, and HSA Bank as viable options.


#2

When you can, make sure you contribute via payroll deduction. That way, you don’t pay Social Security and Medicare taxes on the HSA contributions.

A shout out to the former FWF members who taught me that. :smile:


#3

I too now use a hdhp with hsa mostly because of fatwallet. Big thanks for that.

My admin is fidelity and I’m not a huge fan of them but am getting more used to it.


#4

Is it possible to have both a FSA and HSA? I was thinking if I can get immediate reimbursement, I will claim it from the FSA account and leave HSA untouched


#5

There are some risks involved with this strategy that need to be discussed, but are rarely mentioned in discussions about this strategy.

Recordkeeping risk

IRS Publication 969 sets forth the recordkeeping requirements when making distributions of qualified medical expenses:

Recordkeeping. You must keep records sufficient to show that:

  • The distributions were exclusively to pay or reimburse qualified medical expenses,
  • The qualified medical expenses hadn’t been previously paid or reimbursed from another source, and
  • The medical expenses hadn’t been taken as an itemized deduction in any year.

The second requirement may prove difficult for someone who intends to defer HSA reimbursements over a long period. You are essentially required to prove a negative: prove that you did not receive a reimbursement from another source (such as another health insurance plan or another HSA/FSA/HRA). This, strictly speaking, is an impossible burden, but as a practical matter, it won’t present any problem for someone who is taking HSA reimbursements as expenses are incurred.

If you incur an expense this year, take an HSA reimbursement for it this year, and receive an IRS inquiry about it in 2019, the IRS will almost certainly accept (for the second requirement) the EOB and a statement from you that you did not receive any reimbursement from another source. But, if you incur an expense this year, take an HSA reimbursement for it in 2040, and receive an IRS inquiry about it, you may have a more difficult time. The statement you make in 2040 that you did not have secondary health coverage in 2017 and did not receive a reimbursement of the expense from another source between 2017 and 2040 is inherently less credible than the same statement made in 2019. It is uncertain precisely what the IRS and courts will see as sufficient proof when a long period has passed between the expense being incurred and the reimbursement.

Additionally, there is a risk that the IRS, or even individual auditors within the IRS, could come to see this strategy as abusive (even though it appears to be legal under the current law). That could cause them to be more stringent with the type of proof they will accept to satisfy this requirement for deferred HSA reimbursements.

Uncertain treatment upon death of HSA holder

If you die while deferring expenses for later HSA reimbursement, the beneficiary of your HSA may not have an opportunity to take tax-free reimbursements of those expenses. IRS Publication 969 explains what happens to HSAs upon the death of the holder:

You should choose a beneficiary when you set up your HSA. What happens to that HSA when you die depends on whom you designate as the beneficiary.

Spouse is the designated beneficiary. If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.

Spouse isn’t the designated beneficiary. If your spouse isn’t the designated beneficiary of your HSA:

  • The account stops being an HSA, and
  • The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.
  • If your estate is the beneficiary, the value is included on your final income tax return.

TIP

The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.

If your spouse is not the designated beneficiary, the entire HSA balance is taxable to the beneficiary upon your death. There is no provision for the beneficiary to take tax-free reimbursements of expenses you paid before death and deferred. The 1-year rule appears to only apply to expenses actually paid by the beneficiary after your death.

If your spouse is the designated beneficiary, there is ambiguity as to whether your spouse would be able to take tax-free reimbursements for your deferred expenses. The account retains its HSA status, which is probably helpful.

Possible legislative changes in the future

Congress could act at some future time to limit the time period for taking tax-free distributions of medical expenses, especially if this strategy becomes more popular. Any such change will doubtlessly be discussed on personal finance forums, blogs, etc. well ahead of time, so if you’re keeping up with those, you should be able to take your deferred reimbursements prior to the effective date of any such change. However, if you stop keeping up-to-date on relevant developments (or are unable to), there is a risk that you could unknowingly lose the tax benefit of some or all of the reimbursements you were deferring.

This is only intended as a general cautionary statement; I am not aware of any Congressional proposal or discussion to actually change this (though that doesn’t mean it hasn’t happened).

A suggestion

If you are deferring HSA reimbursements and have unused IRA space at some point, there is no reason not to take HSA reimbursements up to the amount of your unused IRA space and contribute the funds to a Roth IRA. The earnings will be tax-free upon retirement, the contribution can be withdrawn without penalty, and you avoid the long-term recordkeeping burden for those medical expenses. Reimburse the oldest medical expenses first.


#6

Unfortunately Medishare(which I have) is not considered an HDHP although me deductible is 10K. Otherwise I like medishare as my premium is just $190 and satisfies IRS requirement to be covered. Hoping this law gets overturned and also hope medishare becomes recognized as an HDHP


#7

This is my first post over here, coming over from FWF.

I will say I think I joined FWF about 7 years ago when I started my new job and one of the options for health insurance was a HDHP with HSA. I had no idea about anything then. FWF was so kind and answered m y questrions and provided me with plenty of knowledge there.

Now, 7 years later, I have a HSA at Alliant CU (which is ending investment options in a month, more on this later) worth over 33K and my wife now has a HSA with around 9K. We have only had to use the HSA accounts once for a surgery which completely met our HDHP deductible, around 4k.

Without this forum, we’d have wasted tens of thousands of dollars on prepaying for HMO or PPO premiums we never would have used.

Ok, all this said… As mentioned above, my Alliant CU is ending investment options. These were like $6/month in the past. Where is everyone moving to? Most important to me is low ER funds, a good spread of funds and low monthly fee.


#8

After 65, you can take distributions to pay for Medicare premiums. This might be helpful for someone who hasn’t incurred much in the way of medical expenses before that age.

After 65, you can take distributions for any reason at all, without penalty, but you will have to pay the income tax on the distributions.


#9

Great post anotheruser. Thank you for adding this detail about HSA reimbursments.

I can actually attest to this. The IRS has asked us for documentation concerning our reimbursement withdrawals in 2014, and accepted exactly this.

I did have a question I haven’t yet been able to find a clear answer to. What restrictions are their on reimbursing expenses incurred in a prior calendar year?

I know that the IRS publication 969 you linked stipulates that you cannot reimburse for expenses incurred before you established the HSA. But does that mean any expenses after the account establishment are fair game, then, for however many years after said establishment you want them reimbursed?

That seems likely to me, but I would appreciate seeing more guidance on the matter.


#10

I did open an HSA account years ago but it didn’t have any investment options so there wasn’t much growth, the tax deduction was nice. I used to have an insurance plan with Kaiser that was HSA compatible but after Obamacare they got rid of my plan, so do I need to have an HSA compatible health plan to go with it?

My wife is going to need chemo and surgery soon and she’s self employed, so would it work for her to open an HSA account right now and start paying her out of pocket deductibles out of it?


#11

[quote=“DaveHanson, post:9, topic:1251, full:true”]I did have a question I haven’t yet been able to find a clear answer to. What restrictions are their on reimbursing expenses incurred in a prior calendar year?

I know that the IRS publication 969 you linked stipulates that you cannot reimburse for expenses incurred before you established the HSA. But does that mean any expenses after the account establishment are fair game, then, for however many years after said establishment you want them reimbursed?
[/quote]

I don’t believe there are any special restrictions that would apply to expenses incurred in a prior calendar year and reimbursed in a later year, but not to expenses incurred and reimbursed in the same year. Indeed, that is the basis of the strategy being discussed here.

You may find the actual law to be another helpful reference. The law and publication are silent on the possibility of deferring reimbursements over years/decades. I suppose there is a risk that the IRS could, in the future, interpret the law more narrowly regarding deferred reimbursements, but in my non-lawyer opinion, I don’t think the current law gives them much flexibility to do that. There may also be a risk that Congress could act at some future time to explicitly limit tax-free distributions to expenses incurred within a time period. Any such change will doubtlessly be discussed on personal finance forums, blogs, etc. well ahead of time, so if you’re keeping up with those, you should be able to take your deferred reimbursements prior to the effective date of any such change. However, this does present a risk if you aren’t able to keep up with relevant legislative changes, so I should probably add this to my previous post.


#12

This is a great post. HSA’s as an investment vehicle deserve the same attention as IRA’s.

I used to pay medical expenses out of my HSA. Not anymore. I completely stopped that last year. My HSA now does only one thing: it invests in a balanced mutual fund. I set it so contributions automatically go into the mutual fund.

Ordinary medical costs are paid out of pocket with a 2% cash back card. No reimbursement claim is filed. No receipts are kept.

When I have a major medical expense, I will tap the HSA at that time. Also, you are allowed to pay for family members who are taxable dependents. If I have no large medical expenses in my life time, that’s great!


#13

My company offered HSA plan along with regular medical plans. I am wasted opportunity to move to HSA. I am going to opt for HSA plan next year. I end up paying all the medical expenses from HSA account I think. Are there any restrictions on who can use HSA? What if spouse has medical plan from her company. Can she use balances from my account later? How does beneficiary thing work for HSA account?

Thanks


#14

Hi MyBanker,
Do you have both HSA plan as well as regular medical plan?


#15

I previously had a HDHP with HSA but am no longer with that employer and my current employer doesn’t offer a HSA. Just wanted to confirm I have been doing the right thing so far… I had a balance of over $2000 which allowed me to invest into various funds, however, since I left the previous employer i was going to be charged a monthly fee of $5 to keep the account alive. I have begun slowly draining the HSA for my medical expenses. I am currently under $2000 in my totals so I can no longer invest. The interest I get every month on it now is $0.07, and I still have to pay the $5 fee. Is my best bet to drain the fund as fast as I can or do I have better options?


#16

Why not just move it to another provider?


#17

I didn’t know that was an option. What are recommended providers?


#18

My wife currently has an Alliant HSA and that’s being transferred next month. Any suggestions on banks that offer no-fee HSAs with decent interest?

Not really interested in investing any HSA balance yet… I’m more interested in a bank that offers a good HSA (preferably not a credit union since I don’t want to deal with maintaining a share savings account). We’d do a trustee-to-trustee transfer to get the balance out of Alliant.


#19

I recently moved to SelectAccount. Then I found out that COBRA premiums are HSA-eligible. Now it doesn’t matter who my custodian is, since I contribute the max family amount and withdraw it a day later, in December. When COBRA runs out, then I’ll just max it in Dec and leave it for a rainy day, all while filing away receipts.

I do like SelectAccount though. Would recommend them.


#20

Still trying to wrap my head around what is the point of keeping the HSA around if it’s not going to be used. Is it just to collect tax free growth? But eventually you’ll have to take it out and it can only be for medical expenses? Am I missing something here?