Tag Archives: Banking

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.

How to Avoid Health Savings Account Bank Fees

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

I used to have an HSA account through my job but they are not offering that plan anymore, so now I have to pay a fee to keep that account open. Can I transfer that money to another account or another HSA bank where they would not charge me a fee even though my employer doesn’t offer that type of account?

Too many HSA fees

While Health Savings Accounts are a forward thinking way to save money and reduce medical expenses, the banks that provide the actual accounts have not fully caught up with the times. Their offerings suffer from poor web design, lack of tools and features, and restrictive / excessive fees. Even though HSA usage continues to increase at a rapid rate, traditional banks have not yet caught up, and avoiding fees for the HSA owner is an important part of protecting your investment. This article will review some commonly levied fees by one HSA custodian, and discuss 5 ways that you can reduce or eliminate HSA fees in your account.

Research fees structure before opening account

It is surprising how many fees there are related to HSA’s. Not just those specifically relating to your Health Savings Account, but other banking fees thrown in as well. For example, take a look at this screenshot from HSA Bank’s website describing some of their fees:

HSA bank fees

Granted, not all of these fees occur each month, and some of these are legitimate as they support costs for services. I do like how they list strategies on how to avoid the fee. However, as an HSA owner you need to look for recurring or transaction fees that affect your HSA. For example, here are some of the HSA related fees charged by that bank that directly affect HSA owners, some on every transaction!

ATM Withdrawal
Purchase using debit card
Manual withdrawal
Excess Contribution
Invest your HSA (monthly fee)
Account closing

While this bank is free to offer services they see fit, I hate being charged to access my money, so I see some of these fees as egregious and would shop around.

How to avoid HSA fees

Too many fees can add up and reduce your HSA balance over time. Plus, they are just annoying, since it is your money, and you are being nickel and dimed at every turn. As such here are some strategies to avoid or reduce Health Savings Account fees and charges.

Choose low fee plans – this involves doing a bit of research before you open your HSA. While the timing of opening your HSA is important, it is also important to get the best deal possible. Search around online and talk to your bank / credit union to see what types of plans they offer. Somewhere hidden on their website is the fee schedule that you need to review. Apply those fees to your situation and compare the plans of different providers. This will insure that you are at least aware of the fees charged and can choose what is best for you.
Switch HSA custodians – if you already have a Health Savings Account, you can still compare plans and switch to a new custodian if you find a better deal. This is easily done using an HSA Rollover to move funds between HSA accounts. Yes, you can have more than one HSA open at a time at different providers, and there is no tax or penalty to move HSA dollars between them. The point is you don’t have to stick with the HSA custodian your job set you up with, or the custodian where you first opened your account. Instead, do your fee research, find the best deal for you, and make a move if it makes sense.
Maintain the minimum balance – one of the best parts about HSA’s is you can invest your funds tax free. However, many banks have a minimum amount needed to invest, and others levy fees if you are investing but your investment amount is under a certain minimum. Thus, if you can beef up your HSA and meet those minimums investment amounts, the monthly fees will go away forever. This might involve making an extra contribution or two to your HSA, or waiting to invest it until you have the minimum available. I recommend keeping part of your HSA in cash (not invested) at all times in case you need it for health care. Once you have that amount set aside, you can begin investing the rest.
Choose cheapest options –if you look at the fee schedule above, you can see that they offer recommendations of how to avoid their HSA fees. Use this to your advantage by making choices that reduce fees charged. For example, there are a number of ways to pay for an HSA purchase. At the above bank, the associated fees are:
- ATM Withdrawal – $2
- Debit card purchase – $2
- Manual withdrawal – $10
- Online transfer – $0
Thus, it would make the most sense to purchase HSA elgible expenses on your credit card, and do an online transfer from HSA to bank to reimburse the purchase, making it tax deductible. Playing by the bank’s rules can add up and save you a lot of money over time.
Play by the rules –regardless of your bank fees, you want to be familiar with the rules of HSA’s. This will help you avoid taxes and penalties with the IRS as well as your HSA custodian. For example, excess contributions can usually be removed from your HSA before tax day without penalty. However, the HSA custodian above will charge you $25 for the pleasure. In addition, they charge $25 for a transaction correction, which consists of a change to the transaction type, amount, or tax year. By knowing what you can contribute and getting it done correctly the first time, you can avoid this $25 fee.

Note: if you need help reducing HSA bank fees, consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online. Besides tracking everything important, this will help you batch transactions for reimbursement and prevent mistakes that cost you money.

How to Open an HSA if your Employer Doesn’t Offer One

This was a reader question submitted by HSA Edge reader Alice. If you have a question get in touch and we’ll try to help. Email us at evan@hsaedge.com.

Our health insurance is through my husband’s work. We have a HDHP and an HSA account. Our oldest child is now 22 and out of college, employed full time, and we will not be declaring him a dependent on 2016 taxes. He is still on our health insurance plan, as it was the same cost to us.

My understanding is we cannot pay for his medical expenses with our HSA account, since he is not our dependent. I believe he is allowed to open his own HSA account. However, his work says he cannot open it through them, since he’s not on their health plan. My husband’s employer has told us he can open his own HSA but he can only contribute post-tax dollars, completely negating the purpose of the HSA account. What is the law and where/how does he open his own HSA account and contribute pre-tax earnings?

Thanks for your email. I only recently learned about the adult child HSA and it is a great benefit. Everything you say is true: your son has HSA eligible insurance, he can have his own HSA, his employer does not offer an HSA, and you cannot pay for his medical expenses using your HSA. There is just one key part missing that provides the tax benefit.

Your son does not need to have an employer open a Health Savings Account for him, he can do this on his own at whatever banking institution he likes. The only requirement is that you have HDHP eligible health insurance, which he does. All he has to do is some research on banks that offer HSA’s and go online and click “Open HSA Account” and fill out the forms. When selecting a provider, I would look at the fee structure because that can vary; I have had success with HSAbank.com.

In fact, many people establish HSA’s without their employer’s help. Employer’s that offer actual Health Savings Accounts (via a 3rd party banking institution) are likely also making contributions to the employee’s HSA. So in that regard it makes sense that they help you open the account as they will be directing their (and possibly your) contributions there. However, this is not at all required. There are many people (for example, the self employed) who have HSA eligible insurance and open up their own HSA account. Totally legit and acceptable, all the law states that you need is HSA eligible insurance.

As for tax benefits, it is true that your son will contribute post tax dollars to the HSA. However, this amount will be deducted from his income when he files his yearly taxes (see: Automatic vs. Manual Contributions), reducing the amount of tax he owes then. Specifically, when he completes HSA Form 8889, the amount he contributes to the HSA will flow down to Line 13, which will make its way onto Form 1040 and reduce his taxes.

So in summary, he does not need to contribute pre-tax earnings. Instead, his post-tax contributions will be converted into pre-tax contributions once he files his taxes, so he can enjoy all of the benefits of the HSA.

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Note: if you have an HSA, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.