Treavor Dodsworth CFP®, CPA, CKA®
#132 - HSA - Reimbursing Prior Expenses
Health Savings Accounts (HSAs) are one of the more unique financial accounts that an individual can have. This uniqueness presents several planning opportunities.
One little quirk of Health Savings Accounts is that you don’t have to reimburse expenses in the same year that you had the expense for it to be considered a qualified expense. From the IRS Publication 969, “You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish your HSA.” It also says, “State law determines when an HSA is established.”
In other words, let’s say your HSA was established a few years ago and then you incurred a qualifying medical expense that you did not deduct or otherwise reimburse. Even if cash flow is tight or you are wanting to use your cash for other purposes, you could consider making an HSA contribution (if you are eligible to) up to the annual contribution limit and then withdrawing it to reimburse prior expenses.
The advantage of this is cash flow remains relatively the same but you will likely be able to take a tax deduction for the contribution.
There are a number of ways that you can maximize this strategy (choosing a year where tax savings will be greatest, making the contribution through payroll instead of directly to save on FICA tax, etc.).
If cash flow isn’t tight and you are already maxing out retirement vehicles (including HSA), it is likely that you would end up with a better result by not reimbursing past expenses now and instead investing the HSA and giving it an opportunity to grow, but if you have some room to contribute to your HSA it is possible the above strategy will give you some quick tax savings while minimally changing your cash flow.
While the general understanding is you can make a contribution and then reimburse prior expenses, ideally there would be at least a little bit of time between the contribution and reimbursement. Review IRS Publication 969 for other HSA nuances.
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