Question regarding how HSA reimbursement works?

Submitted by alskaksksk t3_yirz98 in personalfinance

I’m confused on a few things here, so firstly the logistics behind HSA reimbursement. Let’s say I have a medical bill for $1000. Instead of using HSA funds, I pay out of pocket. Then when I want to reimburse myself, is $1000 magically being placed into my HSA account by my HDHP provider? Or is it paid directly to me by HDHP provider?

Basically I just want to be 100% sure that when I get reimbursed they will NOT be reimbursing me with my OWN HSA funds that are from my pretax contributions. I’m really hoping that’s not how it works. In that case why even contribute to an HSA.

Secondly, are hdhp deductible related items something that I can reimburse myself with? Or only after deductible is met for “special case” items.

Thirdly, regarding timing. Assuming that I can pay out of pocket and submit documentation for those OOP expenses to get “reimbursed” funds placed directly into my HSA, is it better to get reimbursed immediately or wait till old age?

My thinking is that if I reimburse immediately and those funds are invested into my account it will be much better than waiting till I’m 65 where a $2000 medical bill is like the cost of the flu shot given inflation.

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Annonymouse100 t1_iuk723g wrote

If you pay out of pocket (with post tax funds from your bank account) and then request a reimbursement from your HSA, you are being paid back with your own pre-tax contributions made throughout the year to your HSA. Your employer may also contribute some funds to the health savings account, but they will be commingled with yours.

The benefit is that you are paying for medical expenses with pre-tax dollars and you never pay income taxes on those earnings when they are used to pay for qualifying medical expenses. They can also be invested and grow tax free over your lifetime and be used for qualifying medical expenses in retirement (also tax free.) You can avoid paying income taxes on that income and all earning for life.

Many people do just that and don’t actually use their HSA for medical expenses during their working years and let it grow.

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alskaksksk OP t1_iuk857c wrote

That makes it a bit less appealing if I’m taking money from myself. If I intend to use my HSA to build as large of a balance as possible going into retirement, wouldn’t it make more sense to never reimburse myself? Considering that I always have the maximum out of pocket deductible amount sitting in a separate account?

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Annonymouse100 t1_iuk96op wrote

Yes, and many people do exactly that. They use the HSA as another tax advantaged savings account and cash flow medical expenses when they can, to get the maximum tax free growth over time.

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JellyDenizen t1_iuk79rn wrote

You determine how much to contribute to an HSA each year, and can change mid-year if you want, up to the limit on HSA contributions. Your employer may choose to make a matching contribution of some amount.

When you have an HSA-eligible expense, you can pay directly with HSA funds or with after-tax dollars. If you pay with after-tax dollars you can either do nothing else or reimburse yourself from the HSA (if you have sufficient funds available in the HSA).

If you reimburse yourself, the money you take out of the HSA is not replaced by anyone.

There is no time limit to reimburse yourself from the HSA, but if you delay for years make sure you keep really good records.

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nothlit t1_iuk80tg wrote

When you reimburse yourself, you are taking money out of your HSA. That money originally came from the combination of your own contributions, any employer contributions, and any earnings/growth that have happened over time.

Basically think of it like an IRA or other retirement account, but for medical expenses instead of retirement.

The benefit of an HSA is that the contributions are tax-deductible, the money grows in the HSA sheltered from tax, and is withdrawn to pay for qualified medical expenses completely tax-free. There’s no other account like that.

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alskaksksk OP t1_iukc1rm wrote

So essentially, we should only be withdrawing from an HSA in worst case scenarios? Would you take contributions out of a ROTH IRA prior to an HSA if you needed the funds? Or vice versa? I’d assume you would take out of an HSA prior to Roth IRA (even tho HSA has 3x tax advantage) because typically your Roth IRA has a much larger balance enabling it to compound more interest compared to an HSA. So the effects would be less felt if you hurt your HSA compared to your Roth IRA but I could be wrong

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zffch t1_iuk86qn wrote

No, money does not magically appear in the account. Reimbursement means that you are withdrawing the funds that you put into the account. That's why you're putting money into the account. To take it back out and spend it on medical expenses.

The advantage is that you got a tax deduction for contributing the funds, and that you don't pay any tax to withdraw either.

Ideally, you should leave the money in the account and wait until old age to be reimbursed, that way you can invest the money in it.

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