Spending HSA Money or Expense Account Money?

[Gas_Doc]

In my practice, we more or less have pre-funded HSA's as well as yearly expense accounts. As part of the expense account, I'm told we can use up to $8k/year toward medical expenses. Whatever money is left over in the expense account at the end of the year gets paid out as W2 income and is taxed accordingly. My question is as follows: should I be using HSA (ie Stealth IRA) money or expense account money to pay for my medical expenses?

[jfoxcpacfp]

So the HSA is in the recipients' individual names, right? How is the expense account titled and how is it allocated as it is spent down? If you use the expense account money, it still gets put on your W2, correct? Or is it treated as a small business HRA beginning 1/1/17? You don't want to spend your HSA but I'm a little confused about the expense account.

[Gas_Doc]

jfoxcpacfp wrote:

So the HSA is in the recipients’ individual names, right? How is the expense account titled and how is it allocated as it is spent down? If you use the expense account money, it still gets put on your W2, correct? Or is it treated as a small business HRA beginning 1/1/17? You don’t want to spend your HSA but I’m a little confused about the expense account.

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From my initial summary of benefits: "Non-covered medical services are funded through the Medical Reimbursement Plan at the rate of 80% of the first $10,000 spent for a total benefit of $8,000." It doesn't say if it's being treated as a small-business HRA or not, but money reimbursed via the expense account does not end up on a W2 (as far as I know).

[jfoxcpacfp]

I just realized you work for a PC, not an s-corp or PLLC, right? If so, that makes sense.

My answer is still the same, don't use the HSA.

[Gas_Doc]

jfoxcpacfp wrote:

My answer is still the same, don’t use the HSA.

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Can you explain your rationale? I'm trying to tease out the +/- of each.

Both are tax deductable. The HSA can grow tax free while money paid out of the expense account would have to go toward a taxable account and thus would not grow tax free. But the HSA has to be spent on medical expenses while the paid-out expense money (that is presumeably invested) could be spent on anything after being liquidated in retirement, correct?

If I use the HSA as a Stealth IRA, I just wonder how many medical expenses I will really have in retirement that aren't covered my Medicare. $6,500/year for 30 years with 5% return is near $500k. That's a lot of money toward medical expenses. Can HSA's be passed onto future generations?

[jfoxcpacfp]

Gas_Doc wrote:

jfoxcpacfp wrote:

My answer is still the same, don’t use the HSA.

Click to expand…

Can you explain your rationale? I’m trying to tease out the +/- of each.

Both are tax deductable. The HSA can grow tax free while money paid out of the expense account would have to go toward a taxable account and thus would not grow tax free. But the HSA has to be spent on medical expenses while the paid-out expense money (that is presumeably invested) could be spent on anything after being liquidated in retirement, correct?

If I use the HSA as a Stealth IRA, I just wonder how many medical expenses I will really have in retirement that aren’t covered my Medicare. $6,500/year for 30 years with 5% return is near $500k. That’s a lot of money toward medical expenses. Can HSA’s be passed onto future generations?

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You know that Medicare doesn't cover LTC, right? And that healthcare is the 2nd-highest cost in retirement? Yes, HSAs can be passed along to future generations. Your spouse can use for healthcare penalty-free and pay the tax when used for other expenses.

Non-spousal bene's will pay taxes on distributions unless used to

• pay for medical expenses for the deceased within 1 year of death (tax- and penalty-free), or


• used before age 65 (taxable + 20% penalty)

I still don't understand this expense account and you've provided very little information. It has to be taxed to you at some point. And it is probably use-it-or-lose-it. I don't know of anything that beats an HSA. Except maybe the homeowner exclusion or the stepped up basis (but you've gotta die to get it and that's kind of a bummer).

[spiritrider]

Gas_Doc wrote:

If I use the HSA as a Stealth IRA, I just wonder how many medical expenses I will really have in retirement that aren’t covered my Medicare. $6,500/year for 30 years with 5% return is near $500k. That’s a lot of money toward medical expenses. Can HSA’s be passed onto future generations?

Do not underestimate the amount of qualified medical expenses in retirement.

First, you have Medicare Part B and Part D premiums. Current Medicare Part B premiums are ($134.00 - $428.60(IRMAA depending on income))/month/person. The current Medicare Part D premiums are ($34.00/avg + ($0.00 - 76.20)(IRMAA depending on income))/month/person

Medicare Supplement premiums are not qualified medical expenses, but all Out-Of-Pocket (OOP) costs (including medications) are. If you have substantial HSA assets, the Plan F high deductible plan transfers non-qualified premiums for additional higher qualified OOP costs.

You have qualified vision and dental costs that generally increase as you age. Finally, either LTC insurance or self-insured costs can be significant.

Recent studies have shown that each age 65 current retiree (even without IRMAA additions) can expect to have more that $100K in medical expenses in their lifetime. That is $200K+ for a couple. That $500K in 2047 is not looking so large now is it.

 

HSAs can not be passed on to future generations, but there is little chance there will be anything left unless both spouses have reduced life expediencies.

A spouse beneficiary can take possession and treat the HSA as their own, but in all other cases the HSA ceases to be an HSA on the date of death.

If the non-spouse beneficiary is the estate, the full value must be distributed and is included on the decedent's final income tax return, but there are no penalties.

If the non-spouse beneficiary is not the estate, that beneficiary may pay for medical expenses for the deceased within 1 year of death (tax- and penalty-free) and the balance is fully distributed and included in that beneficiaries income for the year of death, but there are no penalties.

[brentwasham]

I have a Medical Reimbursement Plan (MRP) that my CPA recently helped document for our family business (a C Corp).  I mention it here because I haven't seen much mention of MRPs in the blogosphere.  Mine allows reimbursement for all family medical expenses and health insurance premiums (up to a very large limit).  It is the perfect companion for a High Deductible Health Plan with an HSA.  So far I am charging all out of pocket and health insurance premium expenses to the business, and contributing the max to the HSA.   The advantage is that those expenses are tax deductible to the business, whereas on my personal return they must exceed 10% of AGI.  At some point the HSA balance will be very large, and I expect the business to go away, so I may want to start using the HSA for medical expenses.   I think a lot depends on your age and health, I am 60 in good health as is my spouse, so we will have opportunity in less than 5 years to use it as a traditional retirement account distribution for income, too, should we choose to pay income tax on it.  But then we are also in the age range generally thought to be ideal to start LTC insurance premiums.  The best plan I can formulate for now is to put as much as possible into the HSA and at some point in our 70's decide if we want to start distributing it for medical and LTC expenses to prevent our heirs from being taxed on a very large balance upon the last spouse's death.   A guide to expected health care expenses in senior years, based upon general health and family longevity, would be very useful in deciding what size of HSA balance, at given ages, to maintain.  Its insurance against catastrophic illness, so needs to be coordinated with expected health insurance coverage including Medicare, too.  Its one of those first world problems that's very hard to get your head around!