Health Savings Account Reimbursement Confusion

There are many benefits of Health Savings Accounts (HSA) for people who find that High Deductible Health Plans are a good choice for their coverage needs. One of those benefits is the ability to pay yourself back on medical expenses from the money you contribute. This provides what is essentially a discount on the costs because of the tax-preferred status of money in the account.

One thing our customers have been confused about is when they can reimburse themselves for such costs. The answer is related to the rules defining Qualified Medical Expenses (QME).

According to IRS instructions on medical savings accounts, expenses incurred before you establish your HSA are not QMEs. This means your reimbursement date is the day you established your HSA and not the day you were eligible for an HSA.

This fact seems strange considering how much the government wants people to benefit from the accounts.

• One, medical savings accounts are a rare opportunity for people to keep their money free of federal income tax and most state taxes
• Two, the government wants older people to benefit, allowing Catch Up Contributions that add $1000 to contribution limits for those who are 55 and older.
• Three, under the One Month Rule and Testing Period, the government allows those who switch to HDHPs later in the year to contribute the full amount to their HSAs rather than prorated amounts.
• Four, the government provides many options for those who have contributed too much or incorrectly to their HSA to avoid penalty: even after tax-day.

Yes, it's odd that you're not allowed to reimburse yourself for what might otherwise be qualified expenses from the beginning date of your HDHP, but that is reality. With numerous Affordable Care Act changes on the horizon, perhaps even this can change.

For now, employers offering HDHPs should share this fact with employees and encourage immediate enrollment into an HSA for those who might consider these plans.

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