Tag Archives: HSA Benefits

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.

Reduce Social Security and Medicare Taxes with an HSA

We all know that one of the reasons people open Health Savings Accounts is the triple tax advantage, which, simply stated, means:

HSA contributions are tax free
HSA earnings grow tax free
HSA distributions for qualified medical expenses are tax free

However, there is a hidden fourth tax advantage to HSA’s that is not widely known, and can save you money. The fact is that HSA contributions can be payroll tax deductible as well. In the term “payroll tax” I lump the various taxes often described as FICA taxes which include Social Security, Medicare, and Unemployment Insurance. This is on top of the exclusion to income tax as shown in #1 above.

How to avoid Social Security and Medicare taxes an with HSA

There are various ways to contribute to an HSA which include:

Post-tax contributions
Pre-tax contributions
Employer Contributions
Qualified Funding Distribution (from IRA)

The main method people use to contribute to their HSA is #1 above, via post-tax HSA contributions. This involves depositing money into your HSA from your bank account using dollars you previously paid taxes on. Unfortunately, since those dollars likely came from an employer you would have already paid income, social security, and Medicare taxes. The income tax will be “returned” to you when you file Form 8889, but the Social Security and Medicare taxes are gone and cannot be credited back. In this way, you cannot avoid Social Security or Medicare taxes with a post-tax contribution.

The good news is you can avoid paying Social Security and Medicare taxes using pre-tax contributions. Pre-tax contributions are contributions withheld from your paycheck by your employer and deposited into your HSA for you. This often takes the form of a Cafeteria Plan, which is an automated contribution plan on behalf of the employee. This is an important distinction, because per IRS Form 15, only pre-tax contributions using a cafeteria plan can avoid Social Security and Medicare taxes:

However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan aren’t wages and aren’t subject to employment taxes or (Social Security, Medicare) withholding.

They distinguish that from a “payroll deduction plan” which, while undefined, is likely looser and does not meet the same requirements as a section 125 deduction. The result is you have to be using a section 125 cafeteria plan to make a pre-tax contribution that avoids these additional taxes. Your employer will have more information about this but is likely using this vehicle since it is most advantageous for both the employee and the employer. Contributions made in this way will be deducted from your paycheck before income, Social Security, and Medicare taxes are paid. In this way you save that money and it goes into your HSA instead of being paid to the government. As we will see, this can be a significant amount of money.

How much FICA taxes can you save with an HSA?

Here is a theoretical example of how much you can save on FICA taxes in addition to regular income tax using cafeteria plan HSA contributions. For 2017, you are taxed 6.2% of your income for Social Security up to a salary limit of $127,200. In addition, Medicare is taxed at 1.45% of wages with no ceiling.

Let’s say that for 2018, you have Family HSA insurance which has an (ever-changing) contribution limit of $6,900. Let’s say that you make contribution the family maximum using post-tax dollars. As mentioned, there is no way to avoid Social Security and Medicare Taxes on these amounts. Thus, you will pay:

	Post-Tax	Cafeteria Plan
Contribution	$6,900	$6,900
Social Security (6.2%)	$427.80	$0
Medicare (1.45%)	$100.50	$0
Total:	$528.30	$0

Contrast that with the cafeteria plan, contributions to which avoid these two taxes.

In addition to this, your HSA contribution might save you on various state taxes as well. Many states remove HSA contributions from state tax calculation. One notable exception is are tax hungry states like California who does not allow HSA contributions to be deducted from state income tax. Either way, state taxes for things like Disability and Unemployment insurance can range from 1-2%, so that is another $75 to $150 right there.

How employers save on taxes with an HSA Cafeteria Plan

It is also in an employer’s interest to establish a cafeteria plan for employee’s HSA contributions. This is because employers must also make a contribution to Social Security and Medicare coffers on behalf of the employee. While the employee contributes 6.2% and 1.45% percent of salary (up to limits for SS) to the government, the employer must make the same contribution for employee’s salary. That means that for each dollar you are paid, 12.4% is going to Social Security (6.2% + 6.2%) and 2.9% is going to Medicare (1.45% + 1.45%). This results in a tax of 15.3% going to the government for each dollar you ear.

The cafeteria plan deduction offered to employees also extends to the employer. So employer Social Security and Medicare contributions are not required for employee contributions made through a cafeteria plan to an HSA. So the same example applies, for each employee contributing $6,900 to an HSA via cafeteria plan, the employer can save $528.30 in taxes. Per IRS Form 15:

Your contributions to an employee’s health savings account (HSA) aren’t subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they’ll be excludeable from the income of the employee.

Note: if you need help with your HSA taxes this year, please consider using my service EasyForm8889.com to help complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

HSA Contributions from Others on Form 8889

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

I read your article on “Contributing to HSA’s with a Cafeteria Plan” and have a question. I am a federal employee with the Aetna High Deductible Health Plan. The government automatically deducts my premiums from each paycheck pretax through premium conversion. Aetna contributes $1,500 to my HSA each year. Where do I report Aetna’s $1,500 contribution on Form 8889?

One of the benefits of Health Savings Accounts is that literally anyone willing can make a contribution to your HSA on your behalf. This means that if you have a parent, grandparent, rich uncle, friendly employer, or random organization that wants to give you money for your medical care, you can accept it in your HSA.

HSA Contributions from Others are Tax Deductible

As if receiving free money wasn’t enough, the IRS gives you another special bonus for HSA contributions from others on your behalf. Incredibly, these contributions from others are deductible on your return. Yes, you read that right: if you receive HSA contributions from another person, you receive a tax deduction for this money. Per Form 969:

HSA-contributions-from-others-on-your-behalf-tax-free

In the above, “eligible individual” is the term for the HSA account holder. The result of this amazing tax treatment is that it trues up these other funds going into your HSA, and in effect gives them the same tax preferred status as your regular HSA contributions. In other words, if you receive a an HSA contribution from another on your behalf, you get the contribution as well as the deduction equal to the contribution amount times your marginal tax rate. Score!

Reporting Other HSA Contributions on Form 8889

Come tax time, reporting these contributions on Form 8889 can be a complication. Two lines on that form are used to report regular contributions to the HSA. Line 2 is used to report pre-tax contributions that you made during the year. Amounts on this line will reduce your taxable income. Line 9, on the other hand, is called Employer Contributions and amounts here do not reduce your taxable income. The “contributions from others” do not fall neatly into these categories, and are sort of in an “in between” zone.

Luckily, the Form 8889 instructions provide guidance on this situation. Comparing the two tax form lines, you can see that this situation is explicitly handled:

HSA-Form-8889-Line-2-tax-deductible-contributions
HSA-Form-8889-Line-9-employer-contribution-info

Per your question, it is not entirely clear if Aetna is contributing as your employer or as another entity. Since they are an insurance company, my guess is as another entity i.e. as another on your behalf. In this case, it is the best possible scenario, as you get the free money and get to deduct the contribution.

Note: if you need help recording your contribution on your HSA taxes this year, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.