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Scarlett

HSA--Please explain---slowly

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I just don't get it.  We have access to an HSA and I just submitted the application...I am suppose to be getting a 'welcome' kit in the mail...but how does this work?  We have to fund our own....So if I take 3K out of our savings and put it into this account to use for our deductible...how does that benefit us?  
 

Edited to add:  my biggest confusion was that I didn’t realize that if we put after tax money in the fund ( from our own savings) that it could still be reconciled as tax free money when we file our return the next year.  

Edited by Scarlett

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28 minutes ago, Scarlett said:

I just don't get it.  We have access to an HSA and I just submitted the application...I am suppose to be getting a 'welcome' kit in the mail...but how does this work?  We have to fund our own....So if I take 3K out of our savings and put it into this account to use for our deductible...how does that benefit us?  

Are you talking about healthcare savings?  How ours works is it's pulled out of DH's paycheck before taxes. So it is a tax free account to cover co-pays, etc.  

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If you fund your own, there are two ways of doing so. 1. You put it in yourself by sending in a check or transferring money, and you list the amount on your taxes (you need to fill out a specific form), or 2. Your employer takes it out of your paycheck, and the W-2 has the information on it that you need for taxes (I am not sure if you need a form for this, or not, but it's not an ordeal at all). 

Advantages:

  • You are saving tax money even if you don't itemize. Whatever money you put into it is not considered part of your income.
  • You don't lose the money--it's available until it's all spent out healthcare (if you spend it on something else, you get a BIG tax penalty)
  • You can invest it (how this is done varies from one bank to the next).
  • If you don't spend it, it turns into a regular IRA when you turn 65 (you should check all this out--I don't remember the ins and outs).
  • Until you are 65, you can spend it on virtually any healthcare need (there are some differences between and HSA and FSA for OTC drugs and some devices though). So, this can be for glasses, braces, dental fillings, speech therapy, occupational therapy, doctor's visits, Rx meds, etc. There are published lists of what is okay or not (see IRS guidelines).
  • I believe that you can use the funds to pay for COBRA (but not for normal insurance premiums).

Hope that helps.

You need to keep receipts for everything you pay for from the HSA. It helps if you go to individual providers at the end of the year (and pharmacies) and ask them to print a family or individual ledger. Some of them don't realize they can do this, but some are used to this request. It should list all the payments, what they are for, and if was via cash, credit card, etc. so that you can see what you used your HSA for. 

There are some times of the year where you can still seek reiumbursement for the previous year or make a contribution for the previous year for tax purposes. The IRS has guidelines on this as well.

Keep all your tax forms that come about healthcare (proof of coverage, etc.) so that you have what you need for taxes.

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An HSA can be utilized when you have a high deductible health insurance plan.  And usually if you have that, you can have it funded through payroll deductions.  Those deductions are take from the paycheck pre-tax, much like health insurance premiums and non roth IRA contributions are.  

You say "you have to fund your own."  So, does that mean it's not handled through the paycheck?   Does your employer (or your DH's employer) not offer that option?

If the contributions aren't coming out of the paycheck they can still be deducted, to make them not taxable.  This means that you might have to do other things on your tax returns when you file taxes.  But basically, the advantage to the HSA is the tax savings.  What ever you contribute is not taxable, just like health insurance premiums.

The advantage to a lot of people is that it's a savings account set aside specifically for medical stuff.  Many folks just don't save for medical bills, and by simply having the HSA and having to set up contributions through the employer, many folks see the advantage of actually setting aside specific savings for medical, which they might not have done otherwise.

Also, for those who are more financially savy, HSA funds can be invested, which can provide growth of the funds.  We don't invest ours because we rarely have enough in the account to bother.  We probably will start to invest in the future.

OH, wait, That reminds me......HSA vs FSA.......HSA rolls over.  FSA does not.  I don't know if you have ever had an FSA, but they are super similar, but yeah, that biggest difference is that the HSA rolls over, it functions basically as a savings account.  It's not something you lose if you don't use it by the end of the year.

Anyway, back to the investments....I have heard of people who save and save in the HSA, pay all their medical out of their savings, and then essentially use the HSA as something that they use to pay medical stuff in retirement.  I don't quite understand all those *details* but I do get that since it rolls from year to year, that it could be used in that manner.  

 

 

 

In our case....DH's work offers two options.  The High Deductable with the HSA, and then a PPO that is 80/20.  And once we ran the numbers....doing the high deductable with the HSA actually cost less than doing the PPO with the 80/20.  With the HDP/HSA, every dollar coming out pre tax went towards medical.  With the PPO, even after the deductable was met, that 20% was still post tax.  

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The benefits for us are that money is taken, pre taxes, out of dh's paychecks and his employer also deposits an amount equivalent to half of our deductible as long as dh gets a physical each year. 

I don't really get how it would work if you are funding it all yourself but I would assume it's something you mention when doing taxes to get a benefit. 

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We have one, its funded by us and I opened it at our local bank.  How it works- you put money in and them it can be deducted for tax purposes.  You can use the money at any time for medical expenses- including braces, eye, dental, ect (which many insurance plans dont cover).   Without the HSA, your medical expenses must reach a portion of your income, I want to say 10% but I cant remember,  before you can itemize them off.  There have been many times before the HSA that we had medical bills, but they weren't enough percentage wise to be counted off.  The HSA also allows you to save up for years when you have more expenses.  For example last year I had 2 kids that needed wisdom teeth out.  It doesn't feel like as big a deal when you have that money in a separate account. Ours is also interest bearing- not much!  But it is a little.  

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We also fund ours with payroll deductions and his employer makes a deposit about equal to half the deductible once a year. I really like ours. It means our monthly insurance deduction is lower and if we don't use healthcare we aren't paying for it. We put in the max allowed by the IRS. We have years where it has basically just kept up with our expenses but it is nice to have the separate account there when expenses come up. We had another stretch where we weren't using as much and enough built up in there to pay cash for my dd's braces. It felt like a big win to be able to pay for those up front and with tax free money. It is also great to draw on for all the glasses/contacts, etc my people go through. 

Sometimes things get tight here and in reworking the budget I think about backing off our HSA contributions but once I figure the taxes it is never worth it. It is alot easier to go get new glasses or see the doctor or whatever when that money is already set aside. I know I could set up my own savings for that purpose but we have alot going on and it just wouldn't happen. 

 

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If we start today having dh's employer deduct funds from his paycheck and deposit into the HSA...That doesn't help us with the medical bills we have today.  Dh says we can have them take 3K out of his paycheck to fund it.  That would require me taking 3K out of savings to pay the bills that big deduction normally would have paid.  

But I see now I think you guys are saying that if we just fund it after taxes we can reconcile it when we do our 2020 taxes.

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12 minutes ago, BusyMom5 said:

We have one, its funded by us and I opened it at our local bank.  How it works- you put money in and them it can be deducted for tax purposes.  You can use the money at any time for medical expenses- including braces, eye, dental, ect (which many insurance plans dont cover).   Without the HSA, your medical expenses must reach a portion of your income, I want to say 10% but I cant remember,  before you can itemize them off.  There have been many times before the HSA that we had medical bills, but they weren't enough percentage wise to be counted off.  The HSA also allows you to save up for years when you have more expenses.  For example last year I had 2 kids that needed wisdom teeth out.  It doesn't feel like as big a deal when you have that money in a separate account. Ours is also interest bearing- not much!  But it is a little.  

What does this mean?  You mean when we figure out taxes for our 2020 return that amount will be considered tax free?

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5 minutes ago, Scarlett said:

If we start today having dh's employer deduct funds from his paycheck and deposit into the HSA...That doesn't help us with the medical bills we have today.  Dh says we can have them take 3K out of his paycheck to fund it.  That would require me taking 3K out of savings to pay the bills that big deduction normally would have paid.  

But I see now I think you guys are saying that if we just fund it after taxes we can reconcile it when we do our 2020 taxes.

If you are eligible for the HSA now, and pay it now out of your own savings account, you can still reimburse yourself out of the HSA if you choose to.  At whatever rate you choose to do so.  

ETA: if you are using HSA funds to reimburse yourselves, you don't deduct it because you are using the tax free funds for reimbursement.  

Edited by happysmileylady

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Ok, so what I could do is put 3K in it  from our savings, and then start having $250 deducted per month to get to the point where it is in there when we need it.

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2 minutes ago, happysmileylady said:

If you are eligible for the HSA now, and pay it now out of your own savings account, you can still reimburse yourself out of the HSA if you choose to.  At whatever rate you choose to do so.  

ETA: if you are using HSA funds to reimburse yourselves, you don't deduct it because you are using the tax free funds for reimbursement.  

If we fund it ourselves it won't be tax free....

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5 minutes ago, Scarlett said:

If we fund it ourselves it won't be tax free....

Unless you reimburse yourselves out of the HSA later, which is what I meant.

 

So, say you have a $1k medical bill.  You pay $1k out of your savings account.  Then, you have an HSA funded at $200 per paycheck.  You decide to reimburse yourselves from the HSA at that same rate.  After 5 paychecks, you now have your $1k back in your savings account all pre tax (and your HSA has nothing, cause you have been taking it out to reimburse your savings.)

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Oh wait I might have misunderstood what you are saying.

 

All HSA contributions are tax free.  If it is done through the paycheck, then the money is taken out before taxes.  If you are funding the HSA from your own bank account post tax, then you fill out whatever forms on your 2020 taxes to deduct that part.  It's still tax free.....it just requires more paperwork.

 

 

It wouldn't make sense to take money out of your savings, put it in the HSA, then reimburse your savings from the HSA unless you could do the deductions on your taxes.  But because you can do that when you file, it's still tax free....just.....at tax time not initially.  

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16 minutes ago, Scarlett said:

Ok, so what I could do is put 3K in it  from our savings, and then start having $250 deducted per month to get to the point where it is in there when we need it.

Yes, if you do this, you’d have to claim the 3k as an exclusion, and the $250 per month deducted from your paycheck would be reported on your W2 (already excluded from taxable wages). 

The money should be available for you to use almost as soon as it hits your HSA account, and most HSAs these days give you a debit card to use at the doctor or pharmacy. The card draws directly from the account, so no paying cash and asking for an HSA reimbursement. 

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2 minutes ago, SamanthaCarter said:

Yes, if you do this, you’d have to claim the 3k as an exclusion, and the $250 per month deducted from your paycheck would be reported on your W2 (already excluded from taxable wages). 

The money should be available for you to use almost as soon as it hits your HSA account, and most HSAs these days give you a debit card to use at the doctor or pharmacy. The card draws directly from the account, so no paying cash and asking for an HSA reimbursement. 

So for tax purposes part of it would be handled one way and part of it handled another way....I guess we could just have employer start deducting and see if it keeps up with our spending..Dh spent $200 this week at the PT......

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HSA accounts are limited - I think $3500/individual or $7000/family per year.  You have to have high deductible insurance, I believe, before you can set one up? 
We have one - funds are put in there via payroll deduction tax free. Any earned interest is tax free too. 

 

http://www.hsacenter.com/how-does-an-hsa-work/2019-hsa-contribution-limits/

Edited by Bambam
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1 minute ago, Bambam said:

HSA accounts are limited - I think $3500/individual or $7000/family per year.  You have to have high deductible insurance, I believe, before you can set one up? 
We have one - funds are put in there via payroll deduction tax free. Any earned interest is tax free too. 

 

http://www.hsacenter.com/how-does-an-hsa-work/2019-hsa-contribution-limits/

Yes, ours is a family plan....so we could put $7000 in.  I for sure want $3K in because dh always spends that much on something.  His blood thinners alone get him there by about October each year I think.

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I'll try again 😉 You can put in 7K for a family per year, and that comes off your income when you do your taxes- so pretax.  

Let's say your income is $60,000.  In order to take off medical expenses when itemizing you need to have at least $4500 (7.5% of income) worth if medical bills.  Let's say you have 4k- you do not get to take the deduct anything, and you pay income tax on the whole 60K.  With the HSA, you can put that 4K into your HSA and deduct it, making your new adjusted gross income 56K.  I can't remember exactly what the percentage is that your expenses have to be, but I do remember getting close and not being able to deduct anything more several times over the years!  

I just looked it up- your medical expenses need to be more than 7.5% of your income in order for you to be able to deduct without an HSA. 

Edited by BusyMom5
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4 minutes ago, BusyMom5 said:

I'll try again 😉 You can put in 7K for a family per year, and that comes off your income when you do your taxes- so pretax.  

Let's say your income is $60,000.  In order to take off medical expenses when itemizing you need to have at least 6k worth if medical bills.  Let's say you have 4k- you do not get to take the deduct anything, and you pay income tax on the whole 60K.  With the HSA, you can put that 4K into your HSA and deduct it, making your new adjusted gross income 56K.  I can't remember exactly what the percentage is that your expenses have to be, but I do remember getting close and not being able to deduct anything more several times over the years!  

I don't think this is accurate.  The HSA deduction is a separate line item from deductable medical expenses, just like the student loan interest deduction.  It's on schedule 1, part 2, which comes before taking the standard or itemized deduction, it goes on line 8a.  I believe what you are talking about is medical expenses not paid paid by the HSA, which would be part of the itemized deductions which would go on line 9.  Which means you take the HSA adjustment AND the itemized deductions.....if you had any. Most people don't have enough to bother with itemization anymore.  

 

 

Disclaimer.....I am not a tax professional, nor do I pay one on tv.  

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Wait, I don't think you can reimburse yourself for an expense incurred before you opened the HSA.  So if you had a procedure two months ago but only opened an HSA this month, you can't use HSA funds to pay off that expense.

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6 minutes ago, sgo95 said:

Wait, I don't think you can reimburse yourself for an expense incurred before you opened the HSA.  So if you had a procedure two months ago but only opened an HSA this month, you can't use HSA funds to pay off that expense.

I *think* you can reimburse for BILLS paid while you have an HSA and are eligible for it.  I think you cannot reimburse for bills paid BEFORE the HSA happened.  I think this is true regardless of when the bills occured.  So, say you go into the ER on 1/3/20.  You open the HSA on 1/31.  You receive the bill in 2/15, you pay it on 2/21, you should still be able to reimburse yourself.  

Now, if you go to the ER on 1/3, pay the bill on 1/31, then open the HSA on 2/15, I don't think you can reimburse yourself then.

 

However,  I could be very wrong about this, and it's something to check on.  We have had our HSA for many years now so we haven't had any bills from before the HSA  for several years.  

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Ok, scratch everything I said in the above post  Google says that sgo95 is correct, that if the date of the expense is prior to the opening of the HSA, it's not eligible to be reimbursed.  

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2 hours ago, Scarlett said:

So for tax purposes part of it would be handled one way and part of it handled another way....I guess we could just have employer start deducting and see if it keeps up with our spending..Dh spent $200 this week at the PT......

I don’t know about HSAs, but for FSAs, we can get reimbursed for medical expenses even if there is not yet enough in our account to cover them. During open enrollment in the fall, we specify how much we want to put in to the FSA pre-tax each month, say $250, and the total amount for the year. Then if we get a $1000 medical bill in January, we can still pay it, submit it to the FSA, and get reimbursed long before we’ve actually accrued $1000 in our account.

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4 hours ago, happysmileylady said:

I don't think this is accurate.  The HSA deduction is a separate line item from deductable medical expenses, just like the student loan interest deduction.  It's on schedule 1, part 2, which comes before taking the standard or itemized deduction, it goes on line 8a.  I believe what you are talking about is medical expenses not paid paid by the HSA, which would be part of the itemized deductions which would go on line 9.  Which means you take the HSA adjustment AND the itemized deductions.....if you had any. Most people don't have enough to bother with itemization anymore.  

I think the poster was contrasting the HSA deduction (on the front of the tax form like student loan interest) with how you itemize medical expenses--w.hen you itemize, you can deduct only what exceeds 7.5% of your income. With an HSA, you deduct everything you put in it.

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I’ve often wondered why an HSA is, beneficial, as I peruse the boards! I didn’t realize it was pre-tax money. If you *do* invest the funds, does the interest at any point become taxable?

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10 minutes ago, arctic_bunny said:

I’ve often wondered why an HSA is, beneficial, as I peruse the boards! I didn’t realize it was pre-tax money. If you *do* invest the funds, does the interest at any point become taxable?

 

HSA funds grow tax free and you pay no penalties or income tax as long as you use the funds for eligible health expenses.  

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7 minutes ago, sgo95 said:

 

HSA funds grow tax free and you pay no penalties or income tax as long as you use the funds for eligible health expenses.  

What happens when you die? Is it taxed as part of the estate?

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Also, something to check:   I think the amount of funding an HSA in a given year is dependent upon how many months you have the HDHP plane.  Ie.  if you open up an HSA account in  March, you can't necessarily fund it with $7000 off the bat.  Again-check--there are definite rules about this.....

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8 hours ago, kbutton said:

I think the poster was contrasting the HSA deduction (on the front of the tax form like student loan interest) with how you itemize medical expenses--w.hen you itemize, you can deduct only what exceeds 7.5% of your income. With an HSA, you deduct everything you put in it.

You know what, as I reread it, you are probably right, I think I just misunderstood

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5 hours ago, arctic_bunny said:

What happens when you die? Is it taxed as part of the estate?

If you designate a beneficiary, like you would with an IRA, it *should* just pass to the beneficiary like an IRA or life insurance benefit would.  Now, state laws all differ on how estates are handled, and I could be wrong about that, or wrong in some states but not others lol.  

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My biggest confusion was that I didn’t realize that if we put after tax money in the fund ( from our own savings) that it could still be reconciled as tax free money when we file our return the next year.  

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6 hours ago, vmsurbat1 said:

Also, something to check:   I think the amount of funding an HSA in a given year is dependent upon how many months you have the HDHP plane.  Ie.  if you open up an HSA account in  March, you can't necessarily fund it with $7000 off the bat.  Again-check--there are definite rules about this.....

Oh we have had the insurance for years.  We just never put money into the HSA. And  since it is a Family plan we are able to put $7500 into it yearly but we won’t need that much.  We will just do 3k....

We still haven’t decided if we will start deducting from his paycheck only or have a chunk deducted one month to build it up and not have to worry about it at tax time.  Ugh, that didn’t make sense either.  When I get my packet and have someone I can talk to I am going to see if we can deduct $1500 from dh’s next paycheck to put into the HSA so that it will be tax free.  Then we will also start deducting about $300 a month from his pay which will also be tax free.

Edited by Scarlett

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6 hours ago, vmsurbat1 said:

Also, something to check:   I think the amount of funding an HSA in a given year is dependent upon how many months you have the HDHP plane.  Ie.  if you open up an HSA account in  March, you can't necessarily fund it with $7000 off the bat.  Again-check--there are definite rules about this.....

I'm don't think that's true.  Even if you started a new high deductible health plan on Dec 1, you can open an HSA at that time and fund it completely. 

From the IRS: "Last-month rule. Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month, if you didn’t otherwise have coverage."

Edited by sgo95
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2 hours ago, happysmileylady said:

You know what, as I reread it, you are probably right, I think I just misunderstood

Yes- the HSA is similar to an IRA contribution.  You can deduct such as you put into it.  If you dont have one, then your medical expenses must exceed 7.5% of your income or you cant deduct any of it.  Before we had an HSA, this would happen to us!   We would be just a few hundred short if being able to deduct it!  I know that happened with at least 1 of my pregnancies.   

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8 hours ago, vmsurbat1 said:

Also, something to check:   I think the amount of funding an HSA in a given year is dependent upon how many months you have the HDHP plane.  Ie.  if you open up an HSA account in  March, you can't necessarily fund it with $7000 off the bat.  Again-check--there are definite rules about this.....

I think you can fund it off the bat, but if you do not keep HDHP coverage for the full year, what you can claim on your taxes might be pro-rated. This would be something to check into. I had kind of forgotten about that. I don't know if you get hit with a penalty for contributing too much, but if you do, it's a bad penalty.

2 hours ago, sgo95 said:

I'm don't think that's true.  Even if you started a new high deductible health plan on Dec 1, you can open an HSA at that time and fund it completely. 

From the IRS: "Last-month rule. Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month, if you didn’t otherwise have coverage."

This is for last minute contributions, I believe. 

Scarlett, I think you can still contribute right now for 2019 if you had 2019 HDHP coverage, and then you can make 2020 contributions more slowly. 

Also, you could pay out of pocket and reimburse yourself back later in the year if you don't have enough in your HSA to pay current things. 

If you ask the HSA adminstrators, they can tell you how much longer you have to contribute for 2019. 

For both contributions and reimbursements, I believe you have through March each year as a grace period. 

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Be careful if you're close to Medicare age.  Contributing to an HSA within 6 months before you sign up for Medicare involves a big penalty.

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