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How would Fidelity (who I have my HSA through) know that what I withdrew money for was actually a medical expense? And how does it get reported to count towards my deductible?

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Generally, the HSA is self-reported. The bank/financial provider will allow you to withdraw/spend whatever you want from your HSA. They report to the IRS the total that you withdrew for the year (your gross distributions) on a 1099-SA form. At tax time, you use a form 8889 to report this number of your gross distributions, and how much of it was used for medical expenses. Ideally, all of it was used for medical expenses. If it was not all for medical expenses, there will be extra taxes/penalties due.

Different HSAs work differently, but for mine, which is held at a credit union, I can get money out several ways. I have an HSA checkbook and an HSA debit card that I can use anywhere. I can also transfer money out of my HSA into my regular checking account to reimburse myself for an expense, or even stop in at the teller window and take out cash. The credit union doesn't need to see any receipts for any of this. They don't care if I'm spending it at the doctor's office or the casino. It is up to me to make sure I'm spending the money in accordance to the law and that everything is reported correctly on my tax return.

Nothing is verified unless you get audited. You definitely should keep documentation on the expenses, because if you are audited, you need to be prepared to account for every withdrawal. Make sure you are very familiar with the rules on eligible medical expenses, so you know what is allowed and what is not. IRS Publication 502 has all the details on what is allowed.

As far as how it gets counted towards your deductible, you need to make sure that all of your medical bills get sent to your health insurance, even if you will eventually have to pay for it. For example, let's say you go to the doctor, and the bill is $150. Even if you know that the deductible is not met yet and you will be responsible for the entire $150, make sure the doctor's office submits the bill to your insurance. The insurance company will inform the doctor's office that you are responsible for all of it, but they will apply the amount towards your deductible.

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  • Thanks, great answer. Is there a way to follow up to verify later that the doctor's office bill actually got applied to the deductible? Is there typically a place you can view a "Deductible Remaining Amount" or anything like that with different insurers? – Adam Johns Mar 3 '15 at 5:41
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    @AdamJohns I can only speak for my experiences with my insurance provider. Every time we go to the doctor, we get a statement in the mail from the insurance provider with the details of the bill, the amount that has been applied to the deductible, and the amount that is left on the deductible. We then get a bill from the doctor's office that we have to pay (if the deductible hasn't been met yet). I can also go to our insurance provider's website and see the amount remaining on the deductible. – Ben Miller - Remember Monica Mar 3 '15 at 5:48
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Fidelity answers this pretty well:

  1. Do I need to keep my receipts?

Yes. The IRS requires that you keep your receipts for HSA account expenses. While you will receive an HSA bank account statement each month and you can access your account online, the receipts will be required should you ever be audited by the IRS. You may upload your receipts to the PilotHSA system for easy retrievel at a later date.

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  • Yeah I saw they said keep your receipts for personal reasons like being audited, but Fidelity doesn't need them for anything then I guess? – Adam Johns Mar 3 '15 at 3:58
  • Not as far as I can tell. That would be a difference from an FSA, which does require active receipt uploading/mailing in. In either case they likely use the debit cards to limit this somewhat - if you have the debit card, it will only work on eligible purchases [assuming the HSA debit card is like the FSA one - not sure]. – Joe Mar 3 '15 at 4:00
  • Thinking about this some more, I think this is because HSAs are effectively just bank accounts/money market accounts; they're generally operated by banks or investment firms (Fidelity, Wells Fargo, etc.). FSAs are administered by benefits companies - ADP, Wageworks, etc. - so it's not surprising that they require a bit more active recordkeeping. – Joe Mar 3 '15 at 4:04
  • It's just a little surprising to me that the only check/balance here is if you were ever audited. Other than that you are just trusted. – Adam Johns Mar 3 '15 at 4:06
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    How's that different from almost anything else you do? You don't send the IRS your receipts for your charitable contributions or for really most things. They require forms for the "big" things, but anything small like this presumably is assumed to be small potatoes and not worth jail time for lying about. – Joe Mar 3 '15 at 4:14

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