The flexibility offered by a health savings account makes it a powerful financial tool for a variety of reasons.
An example of this flexibility is the ability for an individual to pay HSA-eligible medical expenses out-of-pocket, rather than through their HSA. This strategy allows for the individual to take maximum advantage of the tax-free growth of HSA assets via interest and investments.
For instance, an employee is in a financial position to pay medical expenses out-of-pocket rather than through her health savings account. This employee maintains a record of the HSA-qualified expenses that she paid out of pocket, which is made easier by many providers who offer an “electronic shoebox” feature with their HSA offering.
In the future, she can retroactively use these expenses to withdraw funds without penalty or tax from her HSA for any purpose. It’s important to note that she can choose to take advantage of this option at any time without restriction and for any purpose.
It’s certainly a great option for those individuals in a financial position to pay expenses with after-tax dollars to maximize the tax-free growth of their HSA funds. But what flexibility does an HSA offer to those who are not quite in the same financial position?
Many individuals use their HSA to pay today’s qualified medical expenses on a tax-preferred basis, and the HSA offers those individuals with flexibility as well.
If an HSA is “established,” which generally means that the account is funded with even a nominal amount of cash, an individual can retroactively fund their HSA to pay or reimburse themselves for qualified medical expenses on a tax-free basis.
One does not need to have adequate funds in their HSA to cover a medical expense at the time the expense is incurred.
For example, a different employee decides to take advantage of the lower premium available through his employer-sponsored high deductible health plan starting January 1. At the same time, he opens and funds an HSA with an initial $25 deposit but doesn’t make any additional contributions.
He incurs a $1,500 qualified medical expense in June. Despite only having $25 in his account, he can retroactively deposit the additional $1,475 into his HSA to pay or reimburse himself for this medical expense.
If he does not have the $1,475 readily available to deposit into his HSA, he can request that the medical provider place her on a payment plan and pay the expense over time through the HSA.
If a payment plan is not available to him, he can make the payment immediately via another method and retroactively reimburse himself over time through her HSA.
Everyone’s financial situation is different, and the health savings account is designed with the flexibility necessary to respond to everyone’s circumstance.
Matt Clarkin is president of Access Point HSA. Access Point HSA is a Rhode Island-based consulting firm serving all stakeholders in the HDHP/HSA marketplace. He can be reached at matt.clarkin@accesspointhsa.com.