HSA Distribution

[Jesse]

Client had an HSA for 1/2 the year then found other employment and was covered under a nonqualifying health plan. Upon changing plans in the middle of the year, to close the HSA, Client w/drew $1,000 from HSA account paid hospital bill of $200 and put remaining amount into personal checking account. Throughout the year total medical and dental bills paid directly by client was in excess of the $1,000.


To avoid penalties can the medical/dental bills paid by the client be "considered" as paid from the HSA? Or must the funds from the HSA be directly traced to medical/dental bills?

[JG EA]

I copied this:

"As long as you incurred those expenses after you opened your HSA, you can get a reimbursement for any qualified expenses. You need only to follow the reimbursement procedures outlined by your HSA Administrator. You can only reimburse yourself out of your HSA account for the patient responsibility shown on your EOB. This will be your true cost for services rendered."

http://www.hsafinder.com/pdf/FAQ-Handout-on-HSAs.pdf

[Jesse]

Thanks for the link. All information I have gone over mentions "reimbursed" expenses.

In this case the client is not really reimbursing for their medical expenses as they took the money out in advance. Or would this be considered reimbursing?

They should have left the money in the account and paid the bills throughout the year. Since they were no longer under the qualifying plan they thought the money could be taken out and as long as qualified medical expenses in the equal w/drawal amount were paid throughout the year they would be penalty free.

[JG EA]

I found this in a CPE book I never finished.

"Health savings account owners can receive tax-free distributions from their HSA to pay or be reimbursed for qualified medical expenses they incur after they establish the HSA. If an individual receives distributions for other reasons, the amount they withdraw will be subject to income tax and may be subject o an additional 10% tax."

If that is all there is on the subject then that seems to leave some latitude.

Actually this is a direct quote from pub 969 as I just found out. Also note Recordkeeping on page 8 of that pub.

But, I guess the IRS could get particular about the meaning of the word Reimburse.

[S T]

From IRS site

Jesse,

Here is some more info http://www.ustreas.gov/offices/publi...ing.shtml#hsa3

I have an HSA but no longer have HDHP coverage. Can I still use the money that is already in the HSA for medical expenses tax-free?
Once funds are deposited into the HSA, the account can be used to pay for qualified medical expenses tax-free, even if you no longer have HDHP coverage. The funds in your account roll over automatically each year and remain indefinitely until used. There is no time limit on using the funds.

What happens to the money in my HSA if I lose my HDHP coverage?
Funds deposited into your HSA remain in your account and automatically roll over from one year to the next. You may continue to use the HSA funds for qualified medical expenses. You are no longer eligible to contribute to an HSA for months that you are not an eligible individual because you are not covered by an HDHP. If you have coverage by an HDHP for less than a year, the annual maximum contribution is reduced; if you made a contribution to your HSA for the year based on a full year’s coverage by the HDHP, you will need to withdraw some of the contribution to avoid the tax on excess HSA contributions. If you regain HDHP coverage at a later date, you can begin making contributions to your HSA again.

Who decides whether the money I’m spending from my HSA is for a “qualified medical expense?”
You are responsible for that decision, and therefore should familiarize yourself with what qualified medical expenses are (as partially defined in IRS Publication 502) and also keep your receipts in case you need to defend your expenditures or decisions during an audit.

Sandy