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September 24, 2008

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You probably can't have the HSA and FSA. (see below)

You CAN use remaining balance in an HSA to pay Medicare. (see below)

The investment options offered depend on the HSA. I found HSAbank.com that allows you to invest your HSA funds via TD Ameritrade.


http://www.ustreas.gov/offices/public-affairs/hsa/faq_eligibility.shtml#hsa7

"My employer offers an FSA, can I have both an FSA and an HSA?
You can have both types of accounts, but only under certain circumstances. General Flexible Spending Arrangements (FSAs) will probably make you ineligible for an HSA. If your employer offers a “limited purpose” (limited to dental, vision or preventive care) or “post-deductible” (pay for medical expenses after the plan deductible is met) FSA, then you can still be eligible for an HSA."

http://www.ustreas.gov/offices/public-affairs/hsa/faq_using.shtml
"When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, copays, and coinsurance under any part of Medicare"

Another point that should be emphasized that I think some people may not realize is this:

http://www.ustreas.gov/offices/public-affairs/hsa/faq_eligibility.shtml#hsa1

"To be eligible for a Health Savings Account, an individual must be covered by a HSA-qualified High Deductible Health Plan (HDHP) and must not be covered by other health insurance that is not an HDHP."


So you can't just go open an HSA on your own like a normal savings account or a Roth or something. You can only get an HSA if you have the specific kind of health insurance plan that offers HSAs.

Can someone help me with this part (Jim maybe you know): I've heard of people planning to use an HSA as a savings vehicle by saving all receipts for medical expenses that could have been reimbursed through the HSA (but the person chose to pay for directly). Their thought is that when they, in retirement, want to withdraw money from the HSA, they will then submit one of the old receipts so that the money is tax-free. Any sense on whether that is permissible? If it is, it entirely changes my view of the HSA.

I think its all OK to pay a cost and then reimburse yourself in a later year. See reference below. Only caveats seem to be that the bill couldnt' have been paid by someone else and you can't claim them as a tax deduction.

http://www.ustreas.gov/press/releases/reports/hsanotice200450072304.pdf
"Q-39. When must a distribution from an HSA be taken to pay or reimburse, on a taxfree basis, qualified medical expenses incurred in the current year?

A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. See Notice 2004-2,Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA.

Example. An eligible individual contributes $1,000 to an HSA in 2004. On December 1, 2004, the individual incurs a $1,500 qualified medical expense and has a balance in his HSA of $1,025. On January 3, 2005, the individual contributes another $1,000 to the HSA, bringing the balance in the HSA to $2,025. In June, 2005, the individual receives a distribution of $1,500 to reimburse him for the $1,500 medical expense incurred in 2004. The individual can show that the $1,500 HSA distribution in 2005 is a reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed and has not been taken as an itemized deduction. The distribution is excludable from the account beneficiary’s gross income."

I should say for the record that I'm not a tax lawyer or anything and I"m not an expert on HSAs. I'm just finding documentation on the web and interpreting it based on my personal opinion.

I researched and wrote that FMF guest post. Its 100% legit.

Regarding investing HSA funds, it all depends on what your HSA provider offers. Mine is at Wells Fargo and my options are limited to a handful of mediocre Wells Fargo funds.

Is there any tax rule that would prevent me from opening an HSA for all the advantages stated above, and still contributing a modest amount to my company's FSA for incidental medical expenses during the year?

No, if you are covered under a High-Deductible Health Plan and thus eligible to contribute to an HSA you cannot contribute into a medical FSA plan to pay for medical expenses. However, most employers will establish what is called a "limited purpose" FSA which allows you to reimburse yourself for non-medical healthcare expenses (e.g. dental expenses, vision expenses, etc.)

Did I understand correctly that my future medicare premiums may be reimbursed with HSA savings even though my current high-deductible premiums are not?

Yes, you can pay future medicare premiums with HSA contributions. You can also pay for COBRA premiums.

Is there such thing as an HSA that lets me self-direct funds into more aggressive individual stocks instead of mutual funds?

It depends on the provider. Most will require a minimum balance.

You could write the IRS and they will give you a ruling on allowing someone do deduct medical expenses from the past. Better to be safe than sorry.

My wife has a FSA account through her employer and is on their insurance; meanwhile the kids and I are on separate insurance policy and thus have a HSA in my name (which can be used to pay her expenses)...I am maxing out contributions, but paying the bills out of pocket and keeping receipts and allowing those invested dollars to grow. I have most of my investments with Vanguard, they have a link on their site to two providers that allow you to invest your HSA in Vanguard funds. I was in a bank HSA which was worthless as we got a little interest each month, but then paid a "bank charge." I didn't see that account ever growing, so moved it so we could invest in funds. Everything I have read is that it is allowable to turn in documentation for reimbursement at any time in the future.

I work for a company that administers health benefits plans and we spent a lot of time looking into the FSA/HSA thing. As other commenters have mentioned, a limited purpose FSA should work fine with an HSA but the code gets pretty iffy when talking about normal FSAs.

In order to contribute to an HSA in a given year, you're not allowed to be covered by any health plan that doesn't meet the high deductible requirement at any time that year and you must have high deductible health insurance. That means you could bundle an FSA, insurance policy and HSA but the FSA has to explicitly have a deductible in the plan docs. You can't just apply your own deductible by not claiming the first $1,100 of expenses.

The thing is, there are very few people that are actually compliant with the HSA tax code and as a result, I'm not sure any FSA administrators offer plans with a deductible. One thing you can do though is pick which years to contribute to an FSA and contribute to the HSA in other years. For example, you might normally choose to be HSA compatible but then if you're planning on having a kid next year, put a bunch of money in the FSA for that year and don't contribute to the HSA. You can go back and forth as many times as you want as long as your FSA plan year starts January 1st.

One last idea is to not contribute anything to the FSA or HSA in a given year. If you experience any major life event (getting married, having kids, etc.) you can elect into the FSA mid-year if you need to. If you don't have that happen, you can contribute to the HSA before April 15th of the next year. So basically you can wait on making a decision on the HSA until the end of the year and only contribute to it if you didn't end up using the FSA.

I have a HDHP through Blue Cross/Blue Shield with a $5500 annual deductible and have an HSA through Optum Health Bank. 50/50 invested in money market and a Vanguard index fund. Optum charges $3 a month to have an account, which I consider high, but have no choice. I save all my receipts for out of pocket medical expenses, but I also keep an annual "health log" on an Excel spread sheet that has all health expenses for the year, from a surgical procedure to buying Advil at Costco. That way I can tally annually how much in my HSA is a qualified medical expense that I can withdraw tax free in years to come. I am probably one of few that is actually compliant with HSA tax code. BTW, I typed a letter that I had my physician sign that said "I recommend Jen____ take fish oil capsules to prevent a lipid disorder, multivitamins to prevent anemia and fatigue, ibuprofen or naproxen for headaches..." Under HSA rules, an over-the-counter medication has to be for a specific condition for it to be considered a qualified medical expense. I tucked this letter into my folder of receipts in case I ever get audited.

The company I work for administers FSA plans. (but not HSAs, not yet anyway). Both of the plans certainly have their advantages and drawbacks. It is correct that you can have a limited FSA (mean to be used for vision and dental expenses) if you have an HSA as well. The idea is that the HSA covers your medical expenses and the FSA covers everything else.

However I would be careful about some of the ideas that Tyler was speaking of. There are certain eligibility rules that you must follow in order to contribute to an HSA. I do not know them in detail but I know one specific rule is that you must remain eligible for an HSA for up to 13 months after you make a contribution. That means that you cannot have any other kind of insurance other than a HDHP, or be covered by an FSA (or your spouse's FSA).

The rules are quite complicated so be sure you investigate everything and ask lots of questions before going with the HSA.

I have medical through a company i'm retired from and this year chose an HSA plan though not contributing to an HSA account. Through my current employer I signed up for the FSA before I chose the HSA from the company I'm retired from. Can I keep the FSA and use it instead of contributing to an HSA account? My company won't let me cancel the FSA even though I have an HSA through another company.

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