Can a client take an HSA distribution for prior-year expenses?

Question of the Week: Can a client reimburse herself from her HSA for expenses she paid out-of-pocket in 2019? Yes—if she meets certain rules.

January 24, 2020

Q: Can health savings account (HSA) funds be used in 2020 to pay for 2019 medical expenses?

A client usually pays her medical expenses from her personal checking account rather than using her health savings account (HSA). In 2019, she paid a large dental bill using her personal checking account. Her dental insurance covered only part of the cost and she was responsible for the rest. She has since decided she’d like to use her HSA to pay the dental bill. Can she reimburse herself from her HSA in 2020 for an expense she paid with her personal checking account in 2019?

A: Yes, if the expenses were incurred after the HSA opened and other criteria are met.

Yes, your client may reimburse herself in 2020 for the expenses she paid in 2019.

HSA owners may receive tax-free distributions to pay or reimburse expenses if the expenses are:

  • Qualified medical expenses,
  • Incurred after the HSA was established, and
  • Not reimbursable by insurance.

It appears that your client has had the HSA for a few years, but has preferred not to distribute funds from the account until now. She can reimburse herself for the part of the bill that wasn’t covered by insurance as well as for any qualified medical expenses she previously paid with funds in her personal checking account or other non-HSA funds. There is no requirement that the HSA reimbursement and the expense fall in the same year.

The definition of qualified expenses for HSA purposes and medical expense deduction purposes is generally the same. Although there is no indication this was not a qualified expense, since this was a dental bill, you might advise the client that HSA funds may not be used for cosmetic dental procedures.

Originally published in the 01/22/20 edition of TAX in the News

For more information, see the Insights article, "Health savings accounts win the triple crown of tax benefits"

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