My HSA Goals (June 2012)

Background
I am a big believer in setting goals and taking action that move you toward those goals.   Goals align your future with your current actions.  They provide an incentive and guide for how you spend your time and resources.

To provide some background, my main financial goal right now is to be debt free, and my target date is April 2013.  I have 3 months left on student loans, as well as around $8k on a car loan.  My current actions involve paying more than the monthly payment while cutting back on other spending.  As soon as my student loan is paid, I will snowball that amount into the monthly car loan.  Once that loan is paid, I will snowball that same amount into savings and investments.  Hopefully in the meantime, I can increase my income.

HSA Goals
After purposefully signing up for an HSA enabled HDHP, I was slow to actually open the account (to the tune of 6 months!).  I finally researched how simple it was to open an HSA and how well it fit my situation.  I then took action by opening an account and integrating HSA contributions into my financial plan.

As I continue to fund my HSA month after month, I have developed the following goals to keep me on track, listed in order of ease:

  • Save an HSA balance that covers 6 months of insurance premiums – I am nearly there on this one, with a current balance of $1k+.  This provides piece of mind for an unexpected unemployment.
  • Build up unreimbursed QME– paying for qualified medical expenses out of pocket builds up unreimbursed QME credits, which you can withdraw from your HSA to pay yourself back.  This is a backup emergency fund, and by paying QME out of pocket, I increase this line of cash that I can tap if needed.  It also protects my HSA in order to let it compound and grow.
  • Cover my deductible – Heaven forbid I ever have a medical emergency, it would be great to have my entire deductible in my HSA at my disposal.
  •  Max out my HSA each year – The maximum contribution for HSA accounts is $3,100, which equates to a monthly contribution of $258.  Currently, I am only contributing $160 per month.  I would like to increase this to $200 per month.  As I am tracking lower than the max, I may make a catch up contribution towards the end of this year if I have some cash lying around.
  • Invest my HSA – Given my views on health care and the advantages of an HSA, I want to be in the HSA for the long term.  Soon, I will break off part of my HSA and invest it via a brokerage, with a time horizon of 30-40 years.  In the end, this will be a nest egg for health expenses, or if I am fortunate, to supplement my retirement.

Actions
In order to achieve these goals, I am taking the following actions:

  • Automated Savings – I have automatic contributions established for both my HSA and emergency fund. This takes the work (and ‘forgetting’) out of saving and keeps me on track every month.
  • Pay QME out of pocket – Using my monthly budget, I try to pay nearly all of my QME out of pocket.  This allows my HSA to grow while providing me the benefit of tax-free reimbursement in the future.
  • Investment Planning – I am a little ways off from being comfortable investing my HSA.  However, that day is drawing nearer.  To prepare for this, I am considering my risk tolerance for this account.  How much do I want to keep liquid, how much should I invest, and how much risk am I comfortable?  After deciding this, I will determine an asset allocation for my HSA, or what investments I will purchase.

Obviously, health care comes first and attending to any sickness / emergencies that arise is goal #1.  Remember, health is true wealth.  Beyond that, I follow these goals to provide some financial soundness to protect my health in the future.

Pay Yourself First – HSA Contribution Automation

A successful long term saving and investment plan requires that goals be both made and acted upon.

The Goal

For a health savings account, the goal is easy – to amass as much of a safety net (or nest egg) as possible to cover future medical costs (or retirement).  Instead a monthly liability, your health care can become an asset that keeps on growing.

This goal is even more appealing when considering the advantages provided by an HSA.  For one, you can save (and invest!) money instead of throwing it away each month on premiums.  That money sits in your HSA account, just like a bank, and is yours forever.  HSA contributions also lower your taxable income.  They can be used to purchase all sorts of non-traditional medical products and services.

In today’s uncertain health care environment, more people are deciding that their goal is to take their health care into their own hands with an HSA.

Action

Acting upon your goal requires discipline and sacrifice.  For establishing an HSA, these actions can be summarized in three steps:

  1. Insure – sign up for a High Deductible Health Plan (HDHP) that is HSA compatible.
  2. Open – open an HSA account with a registered HSA custodian.  I recommend HSA Bank.
  3. Fund – contribute to the HSA account

Insuring yourself is a given.  Opening an HSA account is simple and can be done in 5 minutes.

Funding the HSA is the hardest step as this is where you ‘part’ with your hard earned dollars each month.  Of course, the dollars you contribute are yours until you spend them.

(I procrastinated waited for six months until I began funding my HSA! At my contribution rate, this would equal an additional $960 in my account.)

Setting up an automatic monthly HSA contribution is the easiest way to reach your goal.  Being automatic, you will factor this monthly investment into your budget.  There is no need to remember to transfer the savings each month – it just happens.  It is also more difficult to weasel out and not make the transfer.

When you start out, any amount you can afford is a good amount to begin with. Even starting small at $25 or $50 per month will add up quickly.  I remember looking at my account balance once it hit the $1,000 mark and realizing that this was real money. It is a great feeling to have this kind of protection and security in the bank.  My next goal is to have my deductible fully funded in my HSA.  I would also like to contribute the 2012 maximum of $3,100 to the HSA.

Your HSA administrator will have an option where you can create an automatic, monthly transfer from your primary bank that repeats on the day you choose.  It is very easy to set up and monitor. I set my transfer near the end of the month as it makes the most sense for my biweekly pay period.  Most of my expenses occur at the beginning of the month.  Take a minute, analyze your finances and set up an automatic contribution.  Start moving towards your goals.

 


What are Qualified Medical Expenses?

So you did a lot of research, enrolled in an HSA compatible HDHP, and have even been contributing regularly to your HSA. You have been saving and even investing your funds. Now you need to spend some of it on medical care. What expenses qualify, and can I use my HSA?

First off, we know that purchases of Qualified Medical Expenses (QME) using HSA funds result in no tax being levied on the withdrawal. This is the final step to achieving tax-free medical spending using the Triple Tax Advantage.

However, it is important to understand what expenses are considered qualified.  Doing so allows you to plan your health care spending and maximize the value of those dollars.  By educating yourself, you reduce the risk of incorrectly spending HSA funds.  Accidentally spending your HSA on non-qualified expenses could cause you to file your taxes incorrectly.  This may result in an unexpected tax payment or penalties being due.

Never fear, understanding QME is quite simple. Their scope can be defined by the following:

Who can QME be spent on?

The short answer is you, your spouse, and any dependents you can claim on your taxes.  Even if your spouse or your dependents have their own HSA account, you can still pay for their medical care.

When does QME spending occur?

To be considered qualified, expenses must occur after you have established an HSA.  This means you have opened and contributed to an HSA.  You cannot establish an HSA until the first day of the month following your enrollment in a qualified HDHP.  State laws may determine when your HSA account is officially established.

The lesson here is to setup and contribute to your HSA before you need it.  There is no better time than now as you can complete this in a few minutes.

What is considered a QME?

The IRS has been very lenient with items that are considered QME.  If your expense is remotely medical and reasonable, it seems like it is covered.  This serves as further incentive to participate in HSA accounts.

Here is my unofficial shortlist:

  • Qualified:  anything billed by a doctor/hospital/urgent care, optometrist, chiropractor, dental clinic (excluding cosmetic); prescriptions, and personal medical devises such as contacts, glasses, hearing aids, prosthesis
  • NOT Qualified: Insurance premiums, cosmetic surgery, personal use items (i.e. toothbrush), weight loss programs, health club memberships.  (Note: there are some other funny ones in there, like hair transplant.  At least someone asked; closed mouth doesn’t get fed).

IRS Publication 502 provides a very thorough breakdown of what is considered QME.  If you are unsure of whether an expense is qualified, check that list.

The opening paragraphs provide a good definition and meaning of the term.

Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

How can I pay for my QME?

You can pretty much pay for your QME however you want – the key is in good record keeping.  However, here are the two main options and how they are handled.

  • Pay using your HSA –  when you incur a medical expense, you can pay for it directly out of your HSA.  This can be in the form of a debit card or check.  HSA Bank, who is my HSA custodian, provides free debit cards but charges a small fee for checks.  This method requires very little record keeping as the transaction is complete.
  • Pay out of pocket – you can instead opt to pay for your expenses out of pocket and reimburse yourself at the time of your choosing.  The advantage here is the ‘at a time of your choosing’.  This can be that same day or 40 years in the future.  Consider how valuable that $45 visit will be in 40 years earning 5% per year (answer: $673).  Paying out of pocket allows you to build up unreimbursed QME credits.  I call this a backup emergency fundas you can pull money – tax free – from the HSA in a pinch.Either way, make sure you save your receipt and backup a copy when paying out of pocket.  Proper record keeping is key for surviving an audit and reconciling your future HSA reimbursement.