HSA distribution for deferred insurance payment

Question

My daughter recently started an orthodontics program that will last 13 months. We've covered the entire program cost up-front already. She is covered on my wife's insurance, and that will pay about 50% of the cost. I intend to take a distribution from my HSA for the non-insurance covered amount. However, the insurance payment has a two-part reimbursement - one for 50% of the covered amount now, and 50% in one year. Apparently, this is ensure the orthodontics plan is carried out; if my wife was to lose coverage or we decide not to continue, we'd lose out on that amount.

Is there any mechanism that would allow me to distribute funds from my HSA to cover that long-term 25% now? I'm guessing not, but it never hurts to ask.

Answer 1

Yes, there is a way to do this.

You can take money out of the HSA to reimburse you for anything that you have paid out of pocket on health care that your insurance has not reimbursed you for. Yes, you have been told that a year from now your insurance will pay you that last 25%, but at this point it is just a promise. As you said, there could be any number of reasons why your insurance won't end up paying that amount, such as if you lose coverage for some reason.

As a result, you can take an HSA distribution to reimburse yourself for the entire amount that insurance isn't covering now: 75% of the total cost. However, if and when insurance does pay you for that last 25%, you need to send that money back into your HSA account as a Mistaken Distribution Repayment. When you make this mistaken distribution repayment, you will need to designate it as such to the HSA bank/custodian; this will ensure that it does not count against your contribution limit for that year.

Alternatively, if you do not need this money between now and next year, you could just reimburse yourself for the part that you know you are ultimately responsible for (50%). Next year, either you will get the last 25% from your insurance, or if they don't end up paying you can take the remaining reimbursement from your HSA at that time. There is no time limit for claiming reimbursement of medical expenses from an HSA.