We are being offered an HSA/High Deductible plan and my only concern would be if I had to incur a significant expense at the beginning of the year - no plans to but you never know, right? If I don't have the money in the HSA plan to pay for such a large expense, but 6 months later I've accrued enough to pay for that expense, is there any way for me to "pay myself back" for that expense?
Can I pay myself back later in the year if my HSA doesn't have adequate funds earlier in the year to pay for an expense?
Yes. You can request a distribution for any qualified medical expenses that were incurred any time after the HSA was established, there is no time limit. If you want to maximize tax-free growth you could pay everything out of pocket and wait years for reimbursement.
As Internal Revenue Bulletin: 2004-33 states:
Q-39. When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year?
A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. See Notice 2004-2, Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA.
Many people prioritize maximizing HSA contributions above everything except matching 401k. The contributions (if through employer) are pre-tax, the growth is tax-free, and if used for qualified medical expenses the distributions are tax free too. Whether or not that is a good strategy depends on the investment opportunities your HSA provides and whether or not you want to fuss with keeping medical receipts for many years and keep track of potential HSA rule-changes.
One of the great benefits of the HSA is that you don't have to rush to spend all the money each year. This means if you maximize your contributions, and you don't spend it all, then the situation you are concerned about is only a problem in the first year.
But it still is an important issue. With the program I participate in you have several options when paying for items or services with the HSA.
You can use a debit card, this pulls the money from the account quickly. They have protections to limit the usage of the card to specific types of vendors. This works best when you know the final price of the service or product: co-pays, prescriptions...
You can go to the account website and have the custodian pay the provider. This works best if you will not know the final price of the service. Just wait until the provider files the paperwork, and the Explanation of Benefits is generated. Then send the money to the provider, but don't wait too long so you don't get charged interest or penalties by the provider.
You can pay from your regular funds, and then go to the website and reimburse your self. This works best if the funds are low, or you were not able to use one of the other methods. The complication has been that the account custodian wants a copy of the applicable EOB, to make sure that you aren't pulling money out to cover items that insurance already paid for.
If you are short of funds you will have to use option #3 listed above. Make sure that the service was provided after the start date of the HSA/High Deductible plan, the custodian will be looking for that. If you decide to ave your receipts for years, make sure you don't get confused and submit the same item twice.