Delaying Reimbursement for HSA Purchases

This question was submitted by HSA Edge reader Phillip. Feel free to send in your question today to evan@hsaedge.com.

Does a $45 unreimbursed qualified medical expense (QME) equal only a $45 tax free withdraw later, or does it equal a ($45 + interest/gains) tax free withdraw later? Do you see the distinction?

Paying for Medical Expenses

Each year, you are allowed to make contributions to your HSA based on your coverage and age. Funds in your HSA can be distributed tax free for qualified medical expenses. Regardless of how the funds get in the account, they can come out tax free if used correctly.

That said, you face a choice each time you make a purchase for a qualified medical expense. You can either:

Pay for the expense using funds from your HSA
Pay for the expense using non-HSA funds (say, cash or your credit card)

If you use option 1, the transaction occurs quickly: you buy your medical item and your HSA is reduced.

If you elect option 2, the transaction can occur quite slowly: you buy your medical item with non-HSA funds, and you are now allowed to reimburse that purchase from your HSA at any time in the future. Reimburse means you can transfer funds from your HSA to another (bank) account you own to “pay back” the expense. Doing so in effect pays for the expense with tax-free funds from your HSA. See more information in the article “Using your HSA as an ATM“.

Delaying Reimbursement of Medical Expenses

The interesting thing is the timing of this distribution. If you do it immediately, the transaction ends up looking a lot like #1 above: the money flows from your HSA to your account, and the transaction is fully paid and reimbursed and completed. However, delaying this reimbursement provides some interesting options:

The amount of the purchase remains in your HSA
It can earn interest
It can be invested in stocks, ETFs, or bonds
It may grow to more than the initial amount of the purchase

The crux of your question is with the last bullet above – the purchase may grow to more than the initial amount. Perhaps substantially so. How do I handle this increased amount in my HSA?

Investment Gains in your HSA

In your example, you made a $45 purchase paid with cash instead of using HSA funds. You can reimburse (transfer) that $45 from the HSA to your bank account tax-free at any time, but not more than $45 since the receipt does not justify a higher amount. Going further, say you invested that $45 and it earned $100 before you reimburse (transfer) out the $45. You now have $100 sitting in your HSA. You cannot reimburse it against the $45 receipt, but you can use it to pay for future medical expenses.

Earnings in your HSA are handled just like any other HSA contribution.

When a new medical purchase occurs, this “new” $100 in your account provides two options:

Distribute it to pay for the purchase
Again pay using other funds and continue to invest the $100

Using #2 above, you can see how the whole cycle can repeat and grow your HSA.

This is a powerful concept because doing so allows you to grow medical (and later, retirement) funds tax free and distribute them at no (or low) cost. In theory, you can invest your HSA and grow it beyond the contribution limit for a given year.

Note: I created TrackHSA.com to track medical expenses you plan to later reimburse from your Health Savings Account. It provides record keeping to store purchases, upload receipts, and record reimbursements securely online, no matter how far in the future you choose to reimburse them.

HSA Contribution Limit When Insurance Plan Changes

This question was sent in by HSA Edge reader Oscar. Feel free to email any questions you may have to evan@HSAedge.com

I switched jobs this year. My insurance changed from an HSA to another HSA plan with a different deductible. How does this affect my contribution limit?

Contribution Limit determined by monthly HSA eligibility

The answer to your question is “it depends”, so here is the way to determine this.

Your HSA eligibility is determined on the first day of each month. If you are an eligible individual on the 1st, you “earn” that month’s worth (e.g. 1/12) of the maximum contribution limit. At the end of the year, the sum total of these amounts is your contribution limit for the year.

Remember that an eligible individual is someone who is:

Covered by a HDHP on the first of the month
Has no other health coverage (including FSA’s)
Aren’t enrolled in Medicare
Can’t be claimed as a dependent on someone else’s tax return

IRS Form 969 confirms this:

HSA-what-is-an-eligible-individual

Note that the Last Month Rule can “override” the above logic and increase your contribution limit for the year, based on your eligibility on December 1st.

Calculating contribution limit

Assuming there was no gap in coverage on the first of any month, you will earn that month’s contribution limit as normal. If that means you are an eligible individual during each month of the year, you will earn 12/12 month’s credit and thus 100% of the full contribution limit for the year. This is the maximum contribution afforded to Health Savings Accounts.

On the other hand, if you had a gap in HSA coverage, you might have a reduced contribution limit. For example, if your original HSA coverage ended in August and your new coverage did not begin until October 1st, you would have missed September. That means you lose that 1/12 for September. Assuming you had coverage for the other months in the year, your contribution limit would equal 11/12 x (family/self only limit). Visually, it looks like this:

January – eligible
February – eligible
March – eligible
April – eligible
May – eligible
June – eligible
July – eligible
August – eligible
September – not eligible
October – eligible
November – eligible
December – eligible

For 2018, this equation would be 11/12 x $6,900 family limit = $6,325 for your contribution limit.

Note: If you want help calculating your HSA contribution and filing your taxes, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

When Can I Make My HSA Contribution?

A common question for HSA participants is, “I have HSA insurance this year, so when and how much can I contribute that to my HSA?”. The answer is actually more flexible than you think: you have myriad options of how much and when you contribute to your Health Savings Account. As you will see, the main rule is you need a Health Savings Account established with a bank / custodian to make the contribution. After that, you have flexibility to get your money into the account.

In general, you can make your full HSA contribution at anytime up until tax day of the following year.

Rule 1: You can contribute any amount up to your Contribution Limit

First, know that you can contribute any amount to your HSA as long as it does not exceed your contribution limit. You have complete flexibility in determining how much to contribute. This can be the maximum allowable, $50 per month, or whatever works for you. Remember: if you start coverage mid year, and are insured as of December 1st, you can use the Last Month Rule to contribute as if you were eligible for the entire year.

Rule 2: You can contribute at any time during the year

You need to open a Health Savings Account in order to make a contribution. Of course, you need to prove HSA eligible insurance to open that account, but after that, you can make contributions at any time. The timing can be weekly, monthly, full amount at once, any amount at any time, or even any amount in the subsequent year (see next section).

Rule 3: You can contribute in the following year

A great part of HSA’s is that you can make a contribution in the subsequent year as a prior year contribution. You have until the tax filing day for the year to make a contribution for the prior year. For example, for the 2019 tax year, you have until April 15th (or so) of 2020 to make an HSA contribution for 2019. Just be sure to flag the contribution for the prior year; otherwise, it will apply towards the current year.

Here are some various scenarios to demonstrate how flexible the timing of your Health Savings Account contribution can be:

Scenario 1: You have HSA coverage all year

If you have HSA eligible coverage for the entire year, then you know your contribution limit. From there, you can contribute that amount at any time in any amount during the year. Let’s say you have self-only coverage in 2019 (note that this would work the same for Family coverage, just different amounts). For 2019, your contribution limit is $3,500. Here are some options as to when you can make your contributions:

Contribute full amount of $3,500 on January 1st, 2019
Contribute 1/12th ($291.67) of full contribution limit each month
Contribute $500 each quarter for a total of $2,000
Contribute full amount of $3,500 on April 14th, 2020 as a prior year contribution

Scenario 2: Start HSA coverage mid year

If you begin coverage mid year, your contribution limit will be less than the maximum allowable. This is because HSA eligibility is determined at the start of each month. As a result, your contribution limit may be a fraction (or pro rata amount) of the maximum limit. For example, if your HSA insurance begins November 1st, your contribution equals 2/12 x your maximum contribution. The options for when you can contribute to the HSA are:

Contribute pro-rata amount (for months covered) any time after coverage begins
Contribute partial amount any time after coverage begins
Contribute maximum amount using Last Month Rule any time after coverage begins (see below)
Contribute full amount before tax day in subsequent year as a prior year contribution

Scenario 3: End HSA coverage during the year

Even if your HSA coverage ends, this does not prevent you from contributing to the HSA for that year. A common misconception is “I can’t contribute any longer because I don’t have HSA insurance”. This is because your contribution limit is a “yearly” amount that can be contributed at any time. Even if your coverage ends, you have still “earned” a contribution limit for the coverage you did have during the year.

You can still contribute to your HSA even after your HSA eligible insurance has ended during the year.

However, given that you will not have HSA eligible insurance for some months, your contribution limit will be less than the maximum contribution limit. Be sure not to over contribute or you will have excess contributions and face taxes and penalties.

If your HSA coverage ended, you have many options to contribute to your HSA:

Full amount before coverage ends
Full amount after coverage ends
Partial amount before coverage ends, partial amount after coverage ends
Full or partial amount in subsequent year as a prior year contribution

Scenario 4: contribute more using the Last Month Rule

The Last Month Rule allows you to contribute the maximum contribution limit during a year that you start coverage, as long as you have coverage on December 1st of that year. That means you can contribute more than you could have otherwise based on the months you had HSA coverage. However, remember that using the Last Month Rule binds you to the Testing Period, which requires that you maintain HSA eligible coverage through the subsequent year. If you do not, your “extra” contribution you made via the Last Month Rule will be taxed and penalized.

If you decide to use the Last Month Rule, here are some examples of when you can make that contribution:

Contribute maximum amount during any month after HSA coverage begins. You can’t open a Health Savings Account until you have HSA eligible coverage, so you can’t contribute until you have coverage. Note that doing this before December assumes you will have HSA coverage in December (and the following year).
Contribute percentage of full contribution limit each month after coverage began
Make a one time contribution any month after coverage began
Contribute full amount of $3,500 on April 14th, 2020 as a prior year contribution using the Last Month Rule

Note: Regardless of when you make your HSA contribution, when you need to complete Form 8889 for your HSA, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.