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During a presentation regarding HSAs I was informed the IRS can audit one for an indefinite period of time. The presenter suggested we keep records of our claims for 10+ years in paper form. This seemed to be overkill.

If the IRS was to audit my HSA deductions would my health insurance online claims be adequate? (they have the provider what services they provided and billing codes)

Should I also archive screenshots of these claims digitally somewhere?

Lastly does it make sense to spend the money in my HSA on anything eligible because you can never roll it over into a retirement account, its shaky if another person (spouse) could get reimbursed for eligible medical expenses if you die, and if you lose your receipts you may not be able to spend all of the HSA money tax free. Is this an accurate assessment or is there a reason why I should not touch the HSA money at all and wait to reimburse my eligible expenses.

I am 25 and a USA resident that is financially well off enough to financially max out my HSA and I wouldn't need to use it to reimburse myself for medical expenses (I had a soccer injury that lead to a fair amount of physical therapy so for this year i could take everything that I put in as a deduction, if it is not significantly harmful to my long term financial health). I also max out my Roth IRA and contribute a fair amount to my employer's 401k (well beyond the 6-8% to get the max company match).

I noticed the following strategy here risks to over funding HSA

In general, the best way to allocate your funds is in the following order:

  1. Contribute to a 401(k) if your employer matches funds at a substantial rate
  2. Pay off high-interest debt (8% of more in current environment in 2011)
  3. Contribute to an IRA (traditional or Roth)
  4. Contribute to an HSA
  5. Contribute to a 401(k) without the benefit of employer matching

Should I not reimburse myself from #4 or the HSA funds if I am not hitting the 401k limit yet?

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    It seems worth noting here that at age 65 (or Medicare eligibility), you can withdraw the funds from an HSA without penalty and pay only income tax, even if they are not used toward healthcare expenses. In that way it is not much unlike a traditional IRA, albeit with fewer options to invest from most providers. – Wesley Marshall Jan 6 '17 at 2:26
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The presenter suggested we keep records of our claims for 10+ years in paper form. This seemed to be overkill.

It would be overkill if you're taking distributions regularly and you have enough valid (and otherwise unreimbursed) medical receipts each year to correspond to your distributions. However, if you are pumping money into the HSA without regular distributions, then you may need to keep receipts for a long time, possibly since the beginning of your HSA. For example:

  • You max out the HSA every year to get the tax deduction, you don't take any distributions, and you invest the funds into a growth fund (tax free growth in the HSA).
  • 30 years later, you have $500K in your HSA and you decide you want to spend it.
  • If you have valid medical receipts totaling $500K over the last 30 years, you can withdraw the money all at once without paying a dime of tax. But, when you are audited you will need to show $500K worth of receipts, and you'd probably have to go back quite a few years to accumulate that much.

If the IRS was to audit my HSA deductions would the Aetna online claims be adequate?

It's better than nothing, but it is not ideal. You need to provide proof of what you actually paid, not just what was billed. (How would the IRS know if you actually paid the bill?) So, the bill and receipt together would be preferred. Also, there are many eligible expenses for HSA that would not be covered by your health insurance and would not appear in your Aetna statements (dental work for example). Personally I have an excel spreadsheet with every eligible expense listed, every contribution and distribution I make, and a box of receipts since I opened the HSA account.

Should I also archive screenshots of these claims digitally somewhere?

If you have the time and diligence to do it, then it wouldn't hurt. I personally am only one house fire away from having to make a lot of phone calls if I wanted to re-build my receipts folder from scratch. I actually have "scan my HSA receipts" on my todo list (where's it been for years as a pretty low priority).

Lastly it makes sense to spend the money in my HSA on anything eligible because you can never roll it over into a retirement account, its shaky if another person (spouse) could get reimbursed for eligible medical expenses if you die, and if you lose your receipts you may not be able to spend all of the HSA money tax free. Is this an accurate assessment or is there a reason why I should not touch the HSA money at all and wait to reimburse my eligible expenses.

First off, if you are married the HSA can be transferred to your spouse. But in general, it really depends on what you would do with the money if you distributed it right away. If you need the money to pay debts, bills, etc, then it might make sense to take it, but if it would be extra money that you would invest somewhere, then you should leave it in the HSA because it grows tax free while it's in there and (probably) wouldn't if you take it out. The caveat though is that you need to find an HSA administrator that offers your preferred investment choices. As for your worry that you might lose your receipts, well, that's a valid point- but I wouldn't drive my decision based on that- I would archive them digitally to remove that concern completely.

...Should I reimburse myself from ... the HSA funds if I am not hitting the 401k limit yet?

It depends. If it's a Roth 401k, all other things being equal, (you are able to choose the same investments with your HSA as you can choose in your 401K, and the costs are the same), then you are better off leaving the money in your HSA rather than pulling it out and putting it into the Roth 401k. The reason is that there is no tax difference, and once you put it into the 401K you (probably) can't touch it (for free) until you retire. With the HSA, if you could have taken a distribution but chose not to, then you can take that amount of money out anytime you want to without any consequences, just like your normal checking account. However, if you have a traditional 401k, and if taking HSA distributions would increase your cash flow such that you could afford to contribute more to the 401k, then this would lower your tax burden that year by reducing your taxable income.

  • do you know where an up to date list of HSA expenses are? The top links in google seem to be from 2011 and earlier years and I cant seem to tell if they are up to date. – ngnewb Jan 6 '17 at 0:45
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    @ngnewb The official list of HSA qualified medical expenses can be found in IRS Publication 502. – Ben Miller Jan 6 '17 at 1:48
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Ironically, anyone can say anything, but it doesn't make it true. In normal times, the IRS can audit you for 3 years, or up to 6 for certain cases of fraud - From the IRS site -

How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don’t go back more than the last six years.

HSA spending is reported each year, just like any Schedule A deductions. Each year, I have my charitable receipts, and they are not sent in. They are there in case of audit. I don't need to save them forever, nor does one need their medical bills forever. 3 years. 6 if you wish to be paranoid. The EOBs should be enough.

The HSA is unique in that you deposit pretax dollars (like a traditional IRA or 401(k)) yet withdrawals for qualified expenses come out tax free (like a Roth).

In my opinion, as long as your medical plan qualifies you for an HSA, I'd maximize its use. The older you get, the more bills you'll have, and at some point, you'll be grateful to your younger self that you did this.

  • Great answer Joe in your opinion, Should i maximize the HSA use regarding withdrawals now too, or do you think those should be delayed? – ngnewb Dec 20 '16 at 15:34
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    Right. Only use the HSA funds when you really need to. If your cash flow is fine, and you have the choice between taking $1000 from checking vs the HSA, by all means, leave the HSA alone. It takes a long term view, but time passes quickly. It seems like yesterday I was in the theatre watching the first Star Wars film. And I said to my girlfriend on the way out, "it would be great if they made a sequel showing how they stole those plans." Nearly 40 years later..... – JoeTaxpayer Dec 20 '16 at 16:26
  • It is Significantly Annoying that HSAs are only available when taking a high-deductable health plan. Figuring out how that trades off versus a lower deductable and an FSA is a complication we really don't need. – keshlam Jan 6 '17 at 2:48
  • @keshlam - looking to next year, our insurance offered a plan that would qualify for 'family', but also had an individual deductible, which made it non-compliant. This tiny difference would have made $7750 (over 55) a deduction. – JoeTaxpayer Jul 31 '17 at 14:28
  • From the IRS HSA pages - "You have family health insurance coverage in 2016. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. The plan doesn’t qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($2,600) for family coverage." – JoeTaxpayer Jul 31 '17 at 14:55

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