When Can Paying Medical Claims With an HSA Be Done Tax Free?

By on April 15, 2019

From TerrillConnect: I have have run into this situation several times recently: An employee attempts to pay for their qualified medical expense claim with their health savings account (HSA) tax-free dollars, but are still taxed or face penalties. Why would this happen?

Well, the ability to pay with tax-free HSA dollars is not based on when an employee enrolls in the Qualified High Deductible Plan (QHDHP), but rather when he or she establishes the HSA. Yes, the HSA is established separately from the QHDHP. An employee may decide to establish their HSA immediately, after a few months, or may not establish one at all, even when they are enrolled in a QHDHP.

It’s important to establish the HSA when first enrolled in a QHDHP, even if the employee can only contribute the minimum amount. The contribution can be increased or decreased going forward. The date the HSA is established determines eligibility to “go back” to pay a claim.

Consider this example:

An employee, Don, decides to enroll his family in the QHDHP offered by his employer as of January 1. However, Don does not establish his HSA until February 1. He incurs a $10,000 claim on January 12th with follow up doctor visits on January 16th, 23rd and 30th. On the February 15th payroll, Don adds $5,000 to his HSA to help pay the claims from January. Here’s the timeline:

  • January 1 –  Don enrolls in QHDHP
  • January 12 –  Don incurs $10,000 claim with follow up doctor visits on January 16th, 23rd, and 30th
  • February 1 – Don establishes his HSA
  • February 15 – Don adds $5,000 to his HSA to help pay for January claim

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