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Future HSA disbursement question

Home Retirement Accounts Future HSA disbursement question

  • Avatar GasFIRE 
    Participant
    Status: Physician
    Posts: 212
    Joined: 01/08/2018

    My wife and I have had a family HSA from the beginning when they were allowed. Originally, the insurance and HSA account were through my job, but for the past several years they have been through hers. We are saving expense receipts with the intent of making qualified disbursements in the future. With regard to expenses for dependent children, can the future disbursement be made from either HSA account, or does it have to come from the parent who was providing the coverage at the time? Specifically, can a medical expense incurred by my child today be reimbursed 10 years down the road from my account or does it have to come out of her account?

    #241570 Reply
    Avatar DavidGlennCPA 
    Participant
    Status: Accountant
    Posts: 57
    Joined: 06/12/2019

    My understanding is that the expenses being reimbursed had to have been incurred after the account opened from which it is being reimbursed.  This means for you that the reimbursement needs to come from the account that was open at the time the expense was incurred.

    My reasoning for this position is based on the language in §223(d)(2), which says “The term “qualified medical expenses means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care for such individual, the spouse of such individual, and any dependent of such individual…”.

    The account beneficiary is the account owner.

    This means that only the HSA from which the funds are being withdrawn is considered when determining whether the distribution is for qualified medical expenses.

     

    David Glenn, CPA | Glenn Advisory
    https://www.taxcpafordoctors.com | (808) 321-5664

    #241575 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Like IRAs, HSAs for spouses cannot be intermingled. Reimbursements are supposed to come from the account associated with the insurance plan at the time of the covered expenditure. Practically speaking, do I think you will be audited on which account they come from in the future? About the same probability as WCI volunteering to work night shifts at the ER.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241576 Reply
    Avatar GasFIRE 
    Participant
    Status: Physician
    Posts: 212
    Joined: 01/08/2018

    Thanks Johanna and David. I didn’t realize I could save receipts for the future disbursements until last year when I found out about it on this forum. So I’ll plan on all child expense receipts being applied to her account when the time comes to use the funds. If I can find the old receipts for their braces, maybe I can apply that to my account!

    #241583 Reply
    jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Thanks Johanna and David. I didn’t realize I could save receipts for the future disbursements until last year when I found out about it on this forum.

    Click to expand…

    I wonder how many others don’t realize that.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241586 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    Like IRAs, HSAs for spouses cannot be intermingled. Reimbursements are supposed to come from the account associated with the insurance plan at the time of the covered expenditure. Practically speaking, do I think you will be audited on which account they come from in the future? About the same probability as WCI volunteering to work night shifts at the ER.

    Click to expand…

    The issue might be a distinction without a difference in this case. However, I think it is important to be precise. While HSA accounts are like IRAs in the sense that they are individual accounts for contributions and rollovers. Given the short time difference, it is not likely you saw @davidglenncpa‘s correct post.

    However, as he also pointed out, the dates of service of any qualified medical expense must be on or after the “establishment” date of the HSA to eligible for a tax-free distribution. Note: The status of the individual on the date of service is what matters. The qualified medical expenses of the dependents remain so even if the distribution is later taken when they are no longer dependents. The qualified medical expenses of the spouse remain so even if the distribution is later taken if they are no longer married or even deceased.

    In the OP’s case, the OP’s HSA can be used to reimburse for any qualified medical expenses of himself, his wife and their dependents from the earlier establishment date of his HSA account. His wife’s HSA can be used to reimburse for any qualified medical expenses of herself, her husband and their dependents from the later establishment date of her HSA account.

    Bottom line: Qualified medical expenses with dates of service from the husband’s HSA establishment date to the Wife’s establishment date can only be distributed tax-free from the husband’s HSA. Qualified medical expenses with dates of service from the Wife’s establishment date can be distributed tax-free from both HSAs.

    Special Note: Pay attention to @davidglenncpa‘s clarification of account beneficiary (owner). In the drafting of Section 223, for whatever reason they designated that the individual who has an HSA account is the account “beneficiary“. The gets very confusing if you actually have account “beneficiaries” on your death.

    #241588 Reply
    Liked by GasFIRE, billy
    jfoxcpacfp jfoxcpacfp 
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    The issue might be a distinction without a difference in this case. However, I think it is important to be precise. While HSA accounts are like IRAs in the sense that they are individual accounts for contributions and rollovers. Given the short time difference, it is not likely you saw @davidglenncpa‘s correct post. However, as he also pointed out, the dates of service of any qualified medical expense must be on or after the “establishment” date of the HSA to eligible for a tax-free distribution. Note: The status of the individual on the date of service is what matters. The qualified medical expenses of the dependents remain so even if the distribution is later taken when they are no longer dependents. The qualified medical expenses of the spouse remain so even if the distribution is later taken if they are no longer married or even deceased. In the OP’s case, the OP’s HSA can be used to reimburse for any qualified medical expenses of himself, his wife and their dependents from the earlier establishment date of his HSA account. His wife’s HSA can be used to reimburse for any qualified medical expenses of herself, her husband and their dependents from the later establishment date of her HSA account.

    Click to expand…

    You are correct, we were posting at the same time.

    Call me dense, but I’m still not convinced – or I don’t understand what you’re saying. Is an expense “qualified” if it was not incurred when the dependent is covered by the plan the HSA is associated with? If the status of the individual on the date of service is what matters, the status is that the dependent – in this example – is not covered under the plan. If I am reading your response correctly, an individual could have an HSA for a short period of time and then be eligible to reimburse any future medical expenses, regardless of when they were incurred. I agree that the medical expense can reimbursed when the dependent is no longer a dependent, as long as they were covered under the plan when the expense was incurred. But are you saying that the person can incur qualified medical expenses while not covered by an insurance plan/HSA and still have them reimbursed from an HSA – just because that person was covered at some point in the past?

     

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241593 Reply
    mb(a)CPA mb(a)CPA 
    Participant
    Status: Accountant
    Posts: 18
    Joined: 04/01/2019

    With that said, does anyone have any opinion on whether it would be best practice to cash out qualified expenses for a soon to be former dependent at the end of their dependency (say towards the end of the last year they will be claimed as a dependent)?  I’m not necessarily looking for the letter of the law here, more like practical application in dealing with an IRS audit and avoiding unnecessary administrative complications.

    #241594 Reply
    jfoxcpacfp jfoxcpacfp 
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    Joined: 01/09/2016

    With that said, does anyone have any opinion on whether it would be best practice to cash out qualified expenses for a soon to be former dependent at the end of their dependency (say towards the end of the last year they will be claimed as a dependent)?  I’m not necessarily looking for the letter of the law here, more like practical application in dealing with an IRS audit and avoiding unnecessary administrative complications.

    Click to expand…

    I thought spiritrider was saying the opposite, but I’m obviously not the expert here 😉.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241596 Reply
    Avatar billy 
    Participant
    Status: Physician
    Posts: 162
    Joined: 04/07/2016

    Johanna my understanding to your last question is that you can.  I had an HSA both prior to and after getting married. The last 2 years I have not been able to contribute to an HSA bc I switched insurances, but kept my money invested in it.  It is my understanding that I can still reimburse myself from the HSA for a medical expense that either my wife or I incurred yesterday as well as the ones we incurred while I was contributing to the HSA.  What I can’t do is reimburse myself for any expenses prior to the HSA being established, or for any of my wife’s expenses incurred prior to our marriage.  Also you cant reimburse yourself for expenses that you were able to itemize on your taxes either (no double benefit).  Spiritrider or someone else please correct me if Im wrong.

    #241597 Reply
    jfoxcpacfp jfoxcpacfp 
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    Johanna my understanding to your last question is that you can.  I had an HSA both prior to and after getting married. The last 2 years I have not been able to contribute to an HSA bc I switched insurances, but kept my money invested in it.  It is my understanding that I can still reimburse myself from the HSA for a medical expense that either my wife or I incurred yesterday as well as the ones we incurred while I was contributing to the HSA.  What I can’t do is reimburse myself for any expenses prior to the HSA being established, or for any of my wife’s expenses incurred prior to our marriage.  Also you cant reimburse yourself for expenses that you were able to itemize on your taxes either (no double benefit).  Spiritrider or someone else please correct me if Im wrong.

    Click to expand…

    Actually, that got through my thick head. Of course, I know I could do the same for myself and have preached that as an HSA benefit for years.

    The dependents are still throwing me, though – thinking of the potential of grown, married, kids still qualifying for reimbursement under Pop’s HSA doesn’t strike the same chord. But if that is the IRS’ intent as specified in the code, then who am I to question?!?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241602 Reply
    Avatar DavidGlennCPA 
    Participant
    Status: Accountant
    Posts: 57
    Joined: 06/12/2019

    @spiritrider: Regarding the wording in §223 using beneficiary instead of owner, §223(d)(1) defines an HSA as “a trust created organized in the United States…”.  Since it’s a trust, the beneficiary is the proper term.

    I think I can add a little clarity to this discussion.  There are two main questions we need to address for HSAs and I think the rules for both are getting mixed up –

    1. Can you contribute to an HSA and if so, how much?
    2. Are the distributions from the HSA tax and penalty free?

    In order to contribute you need to be covered by a HDHP for the proper amount of time.  The amount of your contribution is determined by whether it’s just you on the HDHP or you +1.

    For the distributions, §223(f) says that “any amount paid or distributed out of a health savings account which is used exclusively to pay qualified medical expenses of any account beneficiary shall not be includible in gross income.”

    Qualified medical expenses are defined under §213(d) and include expenses for the taxpayer, spouse, and dependents.

    I think that as long as the dependent/spouse was a dependent/spouse on the date of service of the medical expense that the subsequent HSA distribution for that expense will be tax-free, even if it’s 20+ years later.

    There’s no requirement that the dependent/spouse be on the HDHP that is allowing the HSA contribution in the first place.  Just that they’re a spouse or dependent on the date of service.

     

     

    David Glenn, CPA | Glenn Advisory
    https://www.taxcpafordoctors.com | (808) 321-5664

    #241614 Reply
    Liked by billy, GasFIRE
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    But are you saying that the person can incur qualified medical expenses while not covered by an insurance plan/HSA and still have them reimbursed from an HSA – just because that person was covered at some point in the past?

    Click to expand…

    Yes, in fact the individuals with the qualified medical expenses (spouse and/or dependents) need not ever be covered under an account owners HDHP plan. HSA contribution eligibility and tax-free distributions for qualified medical expenses are two separate and distinct requirements.

    Some examples:

    1. An individual with an HDHP only covering themselves with the spouse and children on a non-HDHP medical insurance plan can still reimburse their out-of-pocket qualified medical expenses from his HSA account.
    2. An individual with an HSA account can forever reimburse qualified medical expenses that were incurred after the establishment date of the account regardless if they still have an HDHP.
    3. A classic example is that any individual enrolled in Medicare is ineligible to make HSA contributions, but they can take tax-free distributions from existing HSA balances to pay their and a spouses qualified medical expenses including Medicare Pat B & D premiums.
    4. If an individual can make future HSA contributions to cover past qualified medical expenses. As long as those qualified medical expenses occurred on or after the HSA establishment date of the first HSA account where there is no period >= 18 months with a $0 balance in any HSA account.

     

     

    #241624 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    @spiritrider: Regarding the wording in §223 using beneficiary instead of owner, §223(d)(1) defines an HSA as “a trust created organized in the United States…”.  Since it’s a trust, the beneficiary is the proper term.

    Click to expand…

    Then why aren’t IRA account owners and 401k account owners also called a beneficiary. Those are also considered trusts and direct moves from like IRA -> like IRA and direct moves from 401k -> 401k are called trustee -> trustee transfers.

    26 U.S. Code § 408. Individual retirement accounts(a), Individual retirement account For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:”

    26 U.S. Code § 401. Qualified pension, profit-sharing, and stock bonus plans, (a) Requirements for qualification A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section—”

    My opinion is this was far more likely a drafting error by a clueless congressional staffer or like a lot of financial legislation, a drafting error by a clueless financial institution or association lobbyist.

     

    #241628 Reply
    Liked by Tim
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    But are you saying that the person can incur qualified medical expenses while not covered by an insurance plan/HSA and still have them reimbursed from an HSA – just because that person was covered at some point in the past?

    Click to expand…

    Yes, in fact the individuals with the qualified medical expenses (spouse and/or dependents) need not ever be covered under an account owners HDHP plan. HSA contribution eligibility and tax-free distributions for qualified medical expenses are two separate and distinct requirements.

    Some examples:

    1. An individual with an HDHP only covering themselves with the spouse and children on a non-HDHP medical insurance plan can still reimburse their out-of-pocket qualified medical expenses from his HSA account.
    2. An individual with an HSA account can forever reimburse qualified medical expenses that were incurred after the establishment date of the account regardless if they still have an HDHP.
    3. A classic example is that any individual enrolled in Medicare is ineligible to make HSA contributions, but they can take tax-free distributions from existing HSA balances to pay their and a spouses qualified medical expenses including Medicare Pat B & D premiums.
    4. If an individual can make future HSA contributions to cover past qualified medical expenses. As long as those qualified medical expenses occurred on or after the HSA establishment date of the first HSA account where there is no period >= 18 months with a $0 balance in any HSA account.
    Click to expand…

    Mea culpa. Thanks, as always, for the schooling! Great participation, DavidGlennCPA!

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241684 Reply
    Liked by DavidGlennCPA, Tim

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