Looking for some clarification...

I just transitioned to our HDHP / HSA medical plan at work. Both myself and my employeer make contributions to the HSA. Now I need to invest the contributions... I am going the invest on my own route... which opens a Schwab HSBA...

Here is where the questions come in...

(1) Any help and guidance on the pros and cons of maintaining a minimum cash balance would be appreciated. Is it as simple as deciding how much cash I want to keep on hand for medical expenses? HSA offers a 3,200, $2,000, and custom amount option

(2) If I select a minimum cash balance of $2,000, can I begin investing immediately based on future contributions from myself and my employer to reach that amount, or do I need to wait until those transactions have actually posted? Where I am going is do I need my first transactions to go towards my minimum cash balance before investing opportunity kicks in...

(3) If I have a min cash balance of say $2,000 and my medical bills are $3,000 can I sell investments in my HSBA without penalty to covers the additional $1K in this example?

(4) Is is fair to say the goal of a HDHP is to pay as much medical expenses as possible with cash and use this as a primary retirement account option?

Thank you

fulshearAg96 said:

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Looking for some clarification...

I just transitioned to our HDHP / HSA medical plan at work. Both myself and my employeer make contributions to the HSA. Now I need to invest the contributions... I am going the invest on my own route... which opens a Schwab HSBA...

Here is where the questions come in...

(1) Any help and guidance on the pros and cons of maintaining a minimum cash balance would be appreciated. Is it as simple as deciding how much cash I want to keep on hand for medical expenses? HSA offers a 3,200, $2,000, and custom amount option

(2) If I select a minimum cash balance of $2,000, can I begin investing immediately based on future contributions from myself and my employer to reach that amount, or do I need to wait until those transactions have actually posted? Where I am going is do I need my first transactions to go towards my minimum cash balance before investing opportunity kicks in...

(3) If I have a min cash balance of say $2,000 and my medical bills are $3,000 can I sell investments in my HSBA without penalty to covers the additional $1K in this example?

(4) Is is fair to say the goal of a HDHP is to pay as much medical expenses as possible with cash and use this as a primary retirement account option?

Thank you

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1) My understanding Yes
2) There might be some minimum transfer thresholds. $100 maybe. I think mine currently moves over at ~$100 or $150 bunches without busting the minimum cash balance.
3) Yes. I don't know if that will happen automatically or if you have to manually sell it back then pay the bill
4) Most people that are able (here on TA for example) squirrel the HSA money away in the investment account and let it grow tax free. Your contributions leave your paycheck 100% tax free and as long as they're used for qualifying medical expenses the invested funds can be cashed out, growth included, 100% tax free. Let hose ride as long as possible. Save any/all relevant medical receipts and they can be reimbursed at anytime in the future if you just want the cash or use it to pay for eligible later life care that will undoubtedly be costly.

I welcome others to offer more detailed responses.

I'll add...

Another way to think about the HSA is like the Emergency Fund you've got for other major life stuff. Every financial planner has that 6month, 8month, or even 12month emergency fund in cash ready to go to handle life's emergencies.

It's not a bad strategy to include the HSA in this. Wreck the car, burn the house down, lose your job that CD ladder or bond fund or just a mental minimum balance in a savings/checking account is great. But if it's an unplanned surgery, ER visit, blown knee, etc. or other major medical thing that blows past the deductibles, that big HSA balance (and it's earnings) is an extra $0.20 or more on the $1.00 due to the tax treatment.

Thanks for the feedback.

The other question... Let's say I have my contributions going to a couple of funds in my Schwab HSBA... Are their penalties if I sell those funds and use proceeds to pay for medical care? So I am thinking along the lines of short term capital gains...

My understanding all HSA funds, both in the "bank" and invested are 100% tax free including all interest, dividends, and gains provided the cash is used for qualified medical expenses.

There is no penalty for entering and exiting the markets going too and from stocks, bonds, and cash as long is it remains under the greater HSA umbrella. So Schwab would need to go back to HSA Bank, Optum, or whatever your HSA plan administrator (this may not be the "proper" term) is. Now Schwab might have a fee for making the distribution. That could vary plan to plan. So lets say there's a $20 fee for a distribution, not a big deal if you want $1000, but costly if you want $100 out of the stocks account. It's a rounding error in 10 years if you want $5000 to cover the kids ACL bills.

Also you've still got the minimum cash balance that you've got to maintain in the cash account so you shouldn't be moving small amounts "backwards."

fulshearAg96 said:

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Thanks for the feedback.

The other question... Let's say I have my contributions going to a couple of funds in my Schwab HSBA... Are their penalties if I sell those funds and use proceeds to pay for medical care? So I am thinking along the lines of short term capital gains...

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There would be no federal taxes on any trading activity inside yours HSA.

If you live in California or New Jersey you might have to pay state income tax on those transactions though.

#4 is what I am doing. It's the most tax advantaged account you can have if done this way. Tax free in and tax free out if for medical. Basically an IRA after retirement age with tax on non-medical withdrawals but no penalty. Been invested and contributing for several years and paying cash for everything. I only keep $1100 minimum cash balance.

Same. I have never reimbursed myself for a qualified medical expense but have about $18k in receipts ready if there is ever an emergency where I need access to some tax free withdrawals. My HSA is over 100k now and it's 100% invested.

Dang! I'm only at $30k. Are you doing family contribution limits or single?

Question - If I pay out of pocket and keep my receipts can I withdraw in a future year to get reimbursed if necessary?

fulshearAg96 said:

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Question - If I pay out of pocket and keep my receipts can I withdraw in a future year to get reimbursed if necessary?

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Yes.
My understanding is there is no expiration on those receipts.

permabull said:

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Same. I have never reimbursed myself for a qualified medical expense but have about $18k in receipts ready if there is ever an emergency where I need access to some tax free withdrawals. My HSA is over 100k now and it's 100% invested.

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I'm at $100k as well, after 10 years (opened the account in 2016). I max it out every year and my company gives me $1000. The entire account is in invested, split between FFOLX, FSPGX, and FXAIX

Our HDHP plan used to be free. The premiums have crept up so now the $1k company contribution no longer even covers the premiums.

ABATTBQ11 said:

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Dang! I'm only at $30k. Are you doing family contribution limits or single?

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Family since 2016

Another thing broken about HSA is contributions made with payroll aren't subject to FICA taxes. This is an another advantage over a tax differed 401k since for some earners these contributions are subject to FICA tax

(2) - With my experience at Optum (terrible company) through two different employers, you had to get your cash balance to $2,000 before you could start moving money out of your cash account into your investment account. I would confirm this with your administrator.

I've since moved all of our HSA money into a Fidelity account and never looked to see if they had that requirement since we have $100k in there. Several of us all started contributing around the same time for us all to have ~$100k in HSA.

fulshearAg96 said:

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Question - If I pay out of pocket and keep my receipts can I withdraw in a future year to get reimbursed if necessary?

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yes, that is what permabull was indirectly stating.
With fidelity, you can scan the receipt and key in the relevant info for reference for future tax free withdrawal and proof of expense if the govt comes asking.

If you are playing the long game with health expense receipts, make sure to also save all your Form 8889s over the years. You would not want a zealous IRS agent to question if your 30 old doctors bill was incurred in a year where you had an eligible HDHP. I am also keeping associated bills and EOBs when possible in case a basic and sometime vague receipt doesn't pass muster.