Tag Archives: Record Keeping

Paying for Unemployed Spouse’s Premium Using HSA

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

My spouse became unemployed and we want to use our HSA to pay our premium under IRS rules. However, we have a family plan with both of us on it. Can I use the funds to pay the entire premium or do I need to prorate it to her portion for payment tax free from the HSA?

Using HSA for Insurance Premiums

Sorry to hear that your spouse is in this situation. Using HSA funds to pay for insurance premiums is a great benefit of HSA’s and one way they provide an unemployment safety net.

First off, make sure that your spouse is receiving unemployment compensation from the state or federal government. This means signing up for unemployment benefits and being receiving actual money from a government entity. Do this as soon as possible. Why? Besides receiving funds that will help you during this time, this step is required to treat premiums as qualified medical expenses. Moreover, it is the sole justification in the event anyone at the IRS asks why your premiums were treated as such.

Your HSA can pay for health care coverage while receiving unemployment compensation under federal or state law.

You will need this evidence for each month you treat the premium as a qualified medical expense, and hence, pay for it with your HSA.

Considerations for Family Coverage

Now that you have met the prerequisites, you can pay for your health insurance using your HSA. This has two main benefits:

Cash flow – you use previously saved funds for current expenses
Tax deduction – you use tax free funds for the insurance premiums

As for the amount of the premium, can see the IRS guidance from Form 969 below. It is admittedly vague on this topic but I don’t see any reason you need to prorate the insurance premium only for your spouse.

HSA-unemployment-insurance-premiums-for-spouse

In fact, the spouse case is called out in the highlighted area. if the intent was to split the premium they would have said so explicitly there. Instead, there is no mention of prorating any premium amount, and instead the rules state that “if conditions are met, you may pay for the premium”. Without any mention of prorating, I don’t see it as required. Going a step further, requiring the premium be prorated would be messy and dilute the benefit significantly. For example, consider the case of family coverage with 2 dependents: would only 25% of the premium be HSA eligible?

Based on the above, my take is that if anyone on the family coverage is receiving unemployment benefits, the entire premium can be paid with the HSA.

Note: I created TrackHSA.com to track medical expenses you pay using Health Savings Account, even insurance premiums. It provides record keeping to store purchases, upload receipts, and record reimbursements securely online.

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.

Health Savings Account Deadlines

Overview

Health Savings Accounts function by tax year. So 2017 is distinct from 2018, so on and so forth. Each tax year that you have HSA coverage gives you the opportunity to contribute to your HSA up to your contribution limit. However, eventually that tax year passes and you can no longer contribute to your HSA for that year. This article discusses when those timelines are and how to get the most out of your HSA for a year before the deadline.

HSA Current Year Contribution Deadline

For a given tax year, you can contribute normally to your account from January 1st until December 31st. You can contribute whatever amount you want at any time. This means that some people put the full year’s contribution in on January 1st, some contribute a pro-rata 1/12th each month, and others wait until the end of the year to make the contribution. The only risk you run by contributing early (say, in January) is over contributing. If you contribute the full amount in January, and subsequently end HSA eligible insurance, you will have excess contributions in your account that you need to remove.

The point is you can contribute to your HSA any time during the tax year. But what if you wait too long and miss that deadline?

HSA Prior Year Contribution Deadline

Luckily, the IRS is quite lenient and let’s you make prior year contributions to your Health Savings Account. This means that for a few months in the following tax year, you can make a contribution but flag it as a contribution for the prior year. The deadline for this prior year contribution is the day your taxes are due, generally April 16th.

You have up until tax day (generally April 16th) to make contributions to your Health Savings Account for the prior year. You can make contributions to your HSA for 2016 until April 18, 2017.

Note that making a prior year contribution requires a simple but special action taken with your HSA custodian. When you make the contribution, you will have to indicate specifically that it is going towards the prior tax year. This is because a contribution made in say, January, can be used for either the current year or prior year. Your HSA custodian needs to know how you handle this contribution and to which tax year you want it to count. When you make the contribution there should be an indicator for the tax year, so make sure you pick the correct one.

The IRS outlines the legalities of this in HSA Form 969:

You can make contributions to your HSA for 2016 until April 18, 2017. If you fail to be an eligible individual during 2016, you can still make contributions, up until April 18, 2017, for the months you were an eligible individual.

The interesting thing this points out is you do not need to remain an eligible individual to make prior year contributions. This means that your HSA insurance can end, but you can still wait until the following year to make prior year contributions. As an example, say you have HSA eligible insurance from January – June of 2016. Even if you contribute nothing in 2016, and even though your HSA eligible insurance has ended, you have until April 18th (tax day) of 2017 to make your full contribution limit for 2016. In this case, that would be 6/12 or 1/2 of the full contribution limit for 2016, since you had coverage for 6 months.

Deadline for HSA Employer Contributions

In addition, the deadline for employers to make contributions to your HSA for a given year is also tax day of the following year. Per IRS Form 969:

Your employer can make contributions to your HSA between January 1, 2017, and April 18, 2017, that are allocated to 2016. Your employer must notify you and the trustee of your HSA that the contribution is for 2016. The contribution will be reported on your 2017 Form W-2.

Note that the prior year employer contribution will be reported on your current year W2. This means that it will show as non-taxable income, and won’t affect that year’s contribution limit, but note that it will be there.

HSA Deadline for Reimbursement

One of the benefits of an HSA is there is no true deadline for reimbursing a qualified medical expense. To explain further, note that you can purchase health care using 1) your HSA or 2) something other than your HSA, such as a credit card or cash. If you buy a qualified medical expense with something other than your HSA, you are allowed to “reimburse” yourself for that expense at some point in the future. This reimbursement involves transferring funds from your HSA to yourself, generally the checking account. This in effect pays for the purchase with the HSA, giving you tax free medical spending.

Why would you want to do this? The benefit is that you can keep funds in your HSA longer. If you are investing your HSA, those earnings on HSA funds are growing tax free. By leaving purchases “in” your HSA and fully invested, not only is that money growing, but it is growing tax free, which is a huge IRS advantage. In addition, this reimbursable amount functions as a rainy day fund for you. You are allowed to reimburse it at any time, so if you ever need cash it can be quite helpful.

This is why record keeping and recording your HSA purchases is so important. You need to know what you have purchased, how it was paid, and whether it has been reimbursed or not. These needs were a big reason why I created and use TrackHSA.com, as it provides an audit trail for all of your HSA activity with which you can justify transactions to the IRS should they come knocking.

Note: if you need help accounting for your HSA contributions come tax time, please consider using my service EasyForm8889.com to complete Form 8889. It asks simple questions in a straightforward way and will generate your HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.