We've mentioned it many times on this site, but high-deductible health plans (HDHPs) can be difficult on your wallet if you're not prepared. A lot of spending happens before your insurance kicks in. But health savings accounts (HSAs) can ease the sting by offering a few different ways to save on taxes. Money goes in before paying taxes, it grows tax-free, and you can use it anytime for qualified expenses.
When it's time to pay for expenses, you may know the choices: 1) swipe your HSA debit card or 2) reimburse yourself later. If you forgot to pay yourself back for last year's eye exam, we've got some good news — there's no deadline to get that done. However, there are some things you should also consider before emptying your account.
(As always, know that we're not tax professionals, nor should this article be considered professional tax and financial advice. To find the best solutions for your needs, be sure to speak to a qualified financial professional before making any decisions.)
The HSA contribution limits for 2021 are $3,600 for individuals and $7,200 for families.
There's no deadline for HSA reimbursements
There are lots of reasons to love your HSA, and here's one more — you can reimburse yourself for expenses years after they occurred. According to the IRS, there is no time limit for paying yourself back, but there are some rules (we'll explain more below). You can't reimburse yourself for expenses incurred before you had an HSA. They're also expecting you to keep meticulous records.
Be careful with multiple years of reimbursements
As you learn there's no reimbursement deadline, you may think of paying for medical expenses out-of-pocket, and start stockpiling receipts. Then, you can cash them in many years later by reimbursing yourself. Well, you're not the first one to consider it. Plenty of folks have been doing this for years.
What appears to be the "ultimate hack" requires an extreme level of discipline. Staying on top of receipts for many years isn't easy. And not everyone is equipped to handle that level of record-keeping.
If you decide to reimburse yourself many years later, and the IRS sniffs around, they will ask for proof. Audits do happen. If you can't provide detailed records, you could get stuck paying income tax plus a 20% penalty on your years of withdrawals.
Always keep immaculate records
Being audited is every taxpayer's worst nightmare. If this happened to you, and your HSA distributions were suspect, here's what the IRS would look for:
- Your HSA withdrawals were only used to pay for qualified medical expenses.
- Your medical expenses weren't paid for or reimbursed from another source.
- You didn't take an itemized deduction for these medical expenses in any year. (That's double-dipping!)
Saving receipts and keeping detailed records is always a must. If you take a distribution, your HSA provider will send you Form 1099-SA. Be prepared to report everything with Form 8889. If anything doesn't match, resolve it before filing your taxes.
Itemized receipts should match your HSA withdrawals to the penny. Don't be afraid to call drug stores, doctor's offices, or hospitals for receipts. Their billing department will have access to a line-by-line breakdown of the year's spending.
Timing is important, though. You may have better luck chasing down receipts in November than the first week in April. Your odds of a tax audit may be low, but that's no excuse to get lazy with paperwork.
Reimbursing yourself now means less money for retirement
It's hard to say more choices are bad, but allowing your money to grow may be better. Healthcare will be one of your biggest expenses in retirement. By investing your HSA money now, you could end up with more options when you need it most.