Pay me back ... or pay me not?
December 27, 2012 6:06 PM   Subscribe

Health Savings Account filter: Should I reimburse myself before year-end?

In 2012 I made my max contribution to my HSA. I paid for eligible expenses from the HSA, but also – around $1k – from my ordinary checking account. Naturally, I can reimburse myself from the HSA.

But should I? What’s the advantage?

Under my high deductible health plan, I’ll be obligated for around $2.5k in the first few months of 2013. So how does a $1k reimbursement, tomorrow, from my HSA to my pocket, help me -- when I'll just have to stick it back in?

(This question doesn’t concern the tax deduction, which is determined by contributions, not distributions, so not seeking advice on that, thanks.)
posted by LonnieK to Work & Money (8 answers total) 2 users marked this as a favorite
My HSA plan goes away permanently at the end of each year if I don't use the funds, so you may want to check into that to make sure you don't simply lose money by not reimbursing yourself.
posted by xingcat at 6:14 PM on December 27, 2012

xingcat is thinking of an FSA rather than an HSA. HSA funds carry over year to year.
posted by treehorn+bunny at 6:29 PM on December 27, 2012 [2 favorites]

Ah, that's it! My apologies.
posted by xingcat at 6:45 PM on December 27, 2012

Apologies if I'm missing something, but if 2013 = $2500 contribution regardless of anything else, then taking $1000 out to put in your pocket, and then turning around to put in $2500 = only $1500 of "new" money that has to be put in.

You've already eaten the $1000 from paying it for whatever it went to in 2012, so instead of paying $3500 (the $1000 already spent + $2500 for 2013) in medical expenses, you'd only actually be paying the total $2500 (reimburse the $1000 + $1500 additional), just spread out.

If leaving the $1000 takes it off of the obligation for 2013, then by all means leave it, but if not? Pull it out and put it right back in.
posted by HermitDog at 7:14 PM on December 27, 2012

I guess I should attempt to answer the question as well.

The money you reimburse yourself with from your HSA comes to you tax free.

My understanding of how the HSA works is that you should contribute, at minimum, the amount of your deductible, so that all the money you spend up to that point will be able to be with tax free dollars.

Therefore, for 2013, you will want to put in at least $2500 of your 2013 income (which is not the same as the tax free $ you're getting back from the 2012 reimbursement - these dollars are from new contributions you'll be deducting from your 2013 taxes) to use to pay those future medical bills.

If you will start 2013 with very little in your account and you're thinking that you'll be incurring medical expenses in January that you want to pay with HSA dollars, remember that it typically takes several months for medical bills to get processed and come to you, or you can set up a payment plan with the medical provider to deal with this issue if needed.
posted by treehorn+bunny at 7:22 PM on December 27, 2012

If you have maxed out your 401(k) and IRA, you can treat your HSA as an additional tax deferred savings account. Up until age 65, you can only withdraw money from your HSA for qualified health expenses or else pay an excise tax of 20%. But after age 65 you can use the money for anything you like. So leaving the money in the HSA to accumulate and compound tax-deferred. You pay income tax on withdrawals but defer taxes on any earnings for as long as you maintain the account.

So one strategy is to always fund your HSA to the maximum because this is pre-tax money. Only spend as much as needed to cover your qualified medical expenses and leave the rest to accumulate like an IRA which you can withdraw at retirement. This assumes that you have access to a low fee HSA custodian with low cost investment mutual funds.

As treehorn+bunny points out, the $1000 you reimburse to yourself went in tax free and comes out tax free. You get to spend $1000 of your income without paying any taxes. If you don't pay for your medical bills with this tax free money, then you will have to pay for them with taxable money, meaning it takes $1250 or more of income to pay your $1000 medical bill.

At the least you should fund your HSA to cover all medical bills so you can pay them tax free. That means taking out the $1000 this year, which saves you at least $250 in taxes, and then re-top up the account next year.
posted by JackFlash at 9:49 PM on December 27, 2012

All very helpful ... one last question:

I understand I can reimburse myself from my HSA for a previous year's health expense. If that's so, I can simply do this next quarter, right? And enjoy the same benefits as If I were to do it before 2012 ends.

(The reason for this is a logistical matter .. deposit check clearing, new checks on order, etc)
posted by LonnieK at 9:46 AM on December 28, 2012

You can wait years, even to age 65, to reimburse yourself as long as you keep good documentation and receipts. You just must maintain records matching each reimbursement to each qualifying expense.
posted by JackFlash at 10:44 AM on December 28, 2012 [1 favorite]

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