eimagine offers several insurance plans, one of which allows employees to take advantage of Health Savings Accounts.

There is plenty of information on the internet on what you can spend out of your HSA account.  The point I’d like to make is that HSA money is not very liquid, meaning you cannot easily spend it.  HSA money must be used to purchase appropriate medical services, equipment, or medicine.

So when it comes to spending money, my advice is to never miss an appropriate opportunity to spend money from your HSA account.  This is not to say go out and purchase things you do not need.  Instead, you should not horde cash for emergencies by not using HSA money when you are legally able to do so.  If you have a doctor’s appointment, be sure to use HSA funds to pay for it.  Don’t think that by leaving the money in there you’re saving for a rainy day.  Rainy days come in all shapes and sizes and not all are medical.  You’re accumulating money in your HSA because it’s a tax deduction to do so.

So now that we are (hopefully) agreed on the fact that you should use your HSA funds for all legitimate medical expenses, how much should you save?

This simple question belies the complexity involved in getting a good answer.  However, the minimum amount you should place in your HSA is how much you expect to spend.  You are also much better off having your employer make the deductions for you instead of you making deposits into your HSA account.  Why is that?  When your employer deposits money into your HSA account, you get a deduction off your FICA, saving you even more money, on top of the regular income tax deduction.  When you deposit the money yourself, you can claim the income tax deduction but have fun finding out how to take that FICA deduction.  If your FICA tax rate is 6.2% and you deposit $6,000 over the course of a year, that can cost you $372.00 in extra taxes paid.

What if you end up spending more in the course of the year?  Then increase your deduction to match.  As a last resort, you could make a deposit into your HSA yourself to cover the amount spent.  This would allow you to have money in your account to pay those medical bills, but you would also lose out on that FICA deduction.

If you can afford it, you should try to make the maximum yearly deposit, at least until you can get your HSA balance to cover your maximum out of pocket yearly expenses for your insurance plan.  This is a great way to mitigate the chance of having a medical bankruptcy.  Even if you cannot afford to make the maximum yearly deposit, your goal should be to have as much money in your HSA as would cover those maximum out of pocket expenses.

So now you have two pieces of advice that might seem counter to each other.  One is to spend HSA money when you legally can, and the other is to save as much as you can until you can at least cover yearly out of pocket expenses.  So which is it?

As odd as it sounds, spend the money first, then save it.  Again, this is because HSA money is not very liquid.  You can only spend it on certain things (legally defined medical expenses). You’re usually better off with liquid money than non-liquid money.  The purpose of an HSA account is to allow you to take a tax deduction in the current year for current or future year expenses.  The sacrifice you make when taking advantage of HSAs is part of your money becomes less liquid and it probably won’t earn as much interest as you could otherwise; but at least it’s available for medical expenses and medical emergencies.

What happens if you have a medical expense and your HSA doesn’t have money to cover it?

Here you have two options:

  1. Make a deposit into your HSA and then make an immediate withdraw.  This would allow you to take advantage of the income tax deduction but you would lose that FICA deduction.  You can also only do this if your deposit will not take you over the maximum allowable limit for the year.
  2. Pay by another method, such as credit card.  When you have enough in your HSA, then make a cash withdraw to pay yourself back.  Increase your paycheck HSA deduction to match, if necessary (again, be mindful of the maximum yearly limit).

The second option is the smartest but also requires a bit of work on your part.  Most people don’t keep track of their receipts very well.  Option one will work if you always use checks or a debit card provided to you by your HSA institution.  But if you get creative like I do, you will need to prove that any withdraw you make balances out to legal HSA expenses.  If you withdraw $200 to pay yourself back as in option two above, you better have medical receipts that add up to $200.  In fact, if you do this even once, you should save all your appropriate medical receipts so that you can prove all your withdraws by debit card, check, etc. add up to your legal medical expenses.  This matters whether you withdraw only one dollar or the entire account, you may be asked to provide documentation if you are ever audited.  Be smart.

So what does my family do for medical spending?  We use option 2 all the time.  We never pay with the HSA debit card provided to us except for the last week of the calendar year.  I always pay by credit card and make a transfer between my HSA and my normal checking account to pay myself back.  You may want to see my earlier post on shopping safely.

As for the last week of the year, if anything comes up, THEN we will use the HSA debit card.  I don’t want to risk the bank transfer not coming out of the HSA account before the end of the year.

Note, the above image is ©2011 Keystone Financial Strategies Corporation and can be found on http://www.keystonefinancialwealth.com/.

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