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?

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.

Also if you itemize a health expense you can't double dip and also reimburse yourself from the HSA. So keeping all your taxes to prove you never claimed that deduction wouldn't be the worst idea.

YouBet said:

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(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.

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My company uses Insperity which then links over to Optum for the HSA.
I've been in a "set and forget" mode with it over there for a bit, but recently did so me digging.

100% agree they are trash, but it looks like it might be marginally better (think trash the day before trash day vs trash two days after a holiday when the trucks are behind schedule). I had my transfer threshold set to move the biggest blocks allowed just above their $2000 minimum and it was routing over to Betterment. Despite their name, "Betterment" is the goop that oozes out of post holiday trash and soils your trousers. The MOST aggressive investments I could get was something like a 70/30 stocks to bonds...

I was recently able to go 90/10. But since inception with them (~2021 with this employer, and only having an HSA available since 2019) I'm YoY <8% which is damn near criminal mismanagement.

It looks though like Optum may have lowered their threshold to $1000 and may even have a Schwab option now, so I'm going to be looking into it. Though I'd be better off breaking the Jap codes to figure out AF is Midway than get any actionable information from Optum's trash site!

This is what we do. I could empty my entire HSA with my medical expenses given Type 1 Diabetes, but I stopped reimbursing myself years ago because the real value of the HSA is to let it grow over time.

Sorry , saw Permabull post, was on stairmaster while posting...Another bonus of having your HSA contributions deducted from your paycheck vs contributing on your own are that paycheck deductions also lower your FICA taxes, unlike pretax 401k that just lowers your federal/state income tax, so you save another 7.65% in FICA taxes on what you contribute.

https://www.voya.com/voya-insights/undervalued-benefit-hsa-programs-employers-and-employees-may-be-missing-fica-savings

jsc8116 said:

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Sorry , saw Permabull post, was on stairmaster while posting...Another bonus of having your HSA contributions deducted from your paycheck vs contributing on your own are that paycheck deductions also lower your FICA taxes, unlike pretax 401k that just lowers your federal/state income tax, so you save another 7.65% in FICA taxes on what you contribute.

https://www.voya.com/voya-insights/undervalued-benefit-hsa-programs-employers-and-employees-may-be-missing-fica-savings

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All posters here are maxing out FICA anyway.

So I've only had an HDHP plan for a few years now, so my balance pales in comparison to y'all. However, I am interested in taking the approach of pay OOP and keep the receipts for future reimbursement if needed. I have a few questions with this approach:

1. What information is actually needed? I just picked up a prescription for my toddler's ear infection, so is the receipt from HEB pharmacy sufficient? Or do I need to download and save the EOB whenever that posts in the next few days/weeks?

2. My wife went to urgent care recently as she was feeling like ***** They gave her a computer print-out receipt that shows she used her AMEX to pay for it, and the amount, but they said she'd have to come back in a couple of days if she wanted an itemized receipt. Is an itemized receipt required? Or would the credit card processing confirmation receipt be sufficient?

3. I saw somebody posted above that Fidelity gives you the ability to upload all this information into your account. I also have a home server that I was planning on scanning all the documents to. If I do this, is there any reason to keep the paper copies? We're trying to de-clutter our house, so trying to propose to my wife that I need to start a new file/box to keep all medical receipts for the next 20+ years is going to be a tough sell.

4. Our benefits department uses HSA Bank. I have asked my benefits department if I could change it to my (soon to be opened) Fidelity account, so deposits could be made directly there from payroll. Is that how y'all handle it? Or do you just get your payroll deposit at HSA Bank (or whatever you have) and then do a transfer to Fidelity (or another account)? Not that it's a big deal, but the monthly maintenance fee HSA Bank charges pisses me off, so I want to avoid it if possible.

I went down the rabbit hole of trying to find guidance or case law that tells you exactly what to save and I couldn't find anything.

When you take distributions from the HSA you self report if it was a qualified distribution or not but dont file any documents. It's obviously advised to match receipts to distributions in case of an audit.

I personally keep EOB or print outs from the provider at the time of service as well as the receipt showing I paid for it. I have heard people tell me that isn't enough but the reality is we don't know until they issue guidance.

I'm wondering if statements from your insurance provider showing total OOP costs/spend in a given year would be enough. I can get this from logging into my plan.

I haven't submitted any receipts and don't plan to for a long time, but that would be the easiest thing you could provide.

As perma alluded to, I don't think we truly know yet. The HSA as a retirement vehicle is still a relatively under utilized concept. There will likely be more guidance released over the next 10-20 years as increasing numbers of taxpayers cash in.

ETA there is this official guidance. Good luck proving a negative (that there hasn't already been reimbursement)

I could be wrong on this but my understanding is that you do not need to be on a high deductible plan to incur medical expenses that are eligible to use HSA funds. You just need to be on a HDP in order to contribute to your HSA for any given year.

Mostly true, with the caveat that no medical expense incurred prior to establishment of the HSA qualifies. So save Form 8889 or account statements.

While the burden of proof is on the tax payer, luckily the threshold is more "preponderance of the evidence" rather than "beyond a reasonable doubt".

Question. Say you get audited and don't have the receipts. What is the penalty? Back taxes on the money plus penalty?

permabull said:

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I went down the rabbit hole of trying to find guidance or case law that tells you exactly what to save and I couldn't find anything.

When you take distributions from the HSA you self report if it was a qualified distribution or not but dont file any documents. It's obviously advised to match receipts to distributions in case of an audit.

I personally keep EOB or print outs from the provider at the time of service as well as the receipt showing I paid for it. I have heard people tell me that isn't enough but the reality is we don't know until they issue guidance.

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Sorry, editing this because redundancy is redundant on my post. Posting while working sometimes isn't the smartest idea. Not to derail the conversation. But did the laws for HSA accounts change over the years? When I got my first HSA from an employer, I was told you had 10 years to reimburse, and I'm wondering if they just flat lied to me.

Also, to add to the conversation now. If you're technology inclined, I've started to transfer a lot of our documents/receipts over to a self hosted Paperless NGX server. I use either the scanner on the printer or tiny scanner on my phone to bring hard copy documents in and just upload electronic. So far tagging keeps things pretty organized.

Burdizzo said:

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Question. Say you get audited and don't have the receipts. What is the penalty? Back taxes on the money plus penalty?

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I haven't seen this get audited in all my years of practice. I'm sure its possible, but I haven't seen it yet.

That being said, most auditors will work with you if you are working with them and show a mode of operation. Also, with almost everything being on a bank statement or a credit card statement, there doesnt always have to be a receipt for a specific transaction.