HSA Distribution proof

[nex]

I am planning to reimburse myself for HSA eligible medical care in retirement and have chosen to pay using my Credit Card rather than with HSA funds.

I understand you need to keep proof of payment, and proof that the expense was HSA eligible in order to reimburse yourself for however long you wait (for me likely 30-40 years).

My question is about what qualifies under these and if I am doing it right:

I am using my insurance explanation of benefits as the proof that the care was HSA eligible. Do I need additional proof for that aspect?

For my proof of payment I am going into my credit card transactions segregating the singular transaction and just printing that, rather than waiting for my full statement and including all of it. Is that sufficient, or do I need my full credit card statement as proof of payment. Or are credit card statements and EOB combined not considered sufficient and I need an itemized receipt showing paid in full?(I haven't received one yet)

One final question. I set up a payment plan for the expense, would that make some sort of difference in the way I treat a distribution later on? Or as long as it all adds up to the correct amount it is fine to just track each payment individually?

Maybe I am overthinking this but just don't want to find out later on that I did it wrong and they disallow all my expenses.

Thanks!

[Bsch4477]

In the very unlikely event of an audit what you posted would be sufficient proof. Yes, your payment plan is not relevant. 

[rjs]

I suggest that you keep the bill from the provider, in addition to the EOB. I also suggest that you keep the complete credit card statement, not just the details of individual transactions.

Basically what you are doing seems reasonable. It would probably be sufficient if you were audited now. But 30 or 40 years from now, who knows what the rules will be? No one can tell you with certainty what the IRS will accept today, much less 30 or 40 years from now. So you are taking a slight risk that an examiner in the distant future will not be satisfied with your records. I wouldn't worry too much about it, though. It will probably be fine. But that's just my opinion. It's also quite possible that the IRS will not question what you report after you retire, so don't make yourself crazy about it.

You also need to think about how you are going to preserve your records for 30 or 40 years. Archival storage is not as simple as packing it away and forgetting it. It's an active process. If you are keeping paper records you need to have backup in case the paper records are damaged, lost, or destroyed. You could keep duplicate copies somewhere else, or keep electronic copies of the paper records. You also have to keep the records well organized, protected from deterioration, and keep track of where they are if you move, so you can find them if you need them.

If you are keeping electronic records, either primary or backup, you have to stay in touch with changes in technology. Thirty or 40 years from now there might not be any software or device that can read a file that you save today. You might have to convert files to new formats and new media from time to time. Also, magnetic recordings and solid-state storage do not last forever. You probably have to make fresh copies from time to time to make sure they are still readable.

As far as a payment plan is concerned, Bsch4477 is correct that it won't matter. The basic concern with a payment plan is when the provider actually gets paid. If you make payments directly to the provider, then each payment is counted as a medical expense on the date that you make it. You would need records of the individual payments. But if the payment plan is a loan from a third party, you paid the medical expense when you used the loan to pay the provider. Your subsequent payments to the lender are not medical expenses. This makes a difference if you are deducting medical expenses in the year that you pay them. But 30 years later the distinction won't matter.

[Opus 17]

@rjs  is right about the problems of maintaining those kinds of records.  Printed paper is unstable unless you use acid-free paper and control the humidity of the storage location.  Computer media changes every few years.  CD-ROMs were supposed to last 100 years, it turns out the dyes used in CD-RW discs are somewhat unstable, and who even has a CD reader on their computer today, much less 40 years from now.  I have genealogy documents that I scanned in 1993 at the then-impossible resolution of 300dpi, saved as jpgs, and I also took high quality B&W photos with technical film (I had access to a darkroom back then).  Guess which format is higher quality today?

[Opus 17]

I think your plan misunderstands the present value vs future value of money.  Let's assume the tax laws and the economy stay more or less the same.  You contribute $1000 in the HSA and you have a $1000 expense today.

If you delay the reimbursement for 30 years, that $1000 in the HSA is likely to grow to around $10,000 (if you have it invested in a market index fund and the market makes 8%).  You can withdraw $1000 as a completely tax-free reimbursement to yourself, but you will pay regular income tax to withdraw the other $9000.  Assuming tax rates around 25%, you get $6750, plus the $1000.   In other words, you invested $1000 plus paid a $1000 medical bill in 2025, for a return of $7750 in 30 years, that's a return of only 4.5% per year.  

However, if you contribute $1000, and reimburse yourself right away, you have $220 of tax savings, plus the $1000 you don't have to pay to the provider.  If you invest that $1220 in a Roth IRA at a market average of 8%, you will have $13,341 in 30 years. Twice as much money as your delayed reimbursement scheme.

If you are maxed out on both your Roth 401k and Roth IRA contributions, you can invest the money in stocks, and pay 15% long term capital gains tax instead of 25% or more regular income tax (again, assuming the laws stay the same), ending up with $11,300, which is a 45% higher return than your delayed reimbursement scheme (assuming you have the ability to invest your tax savings and your medical costs instead of spending it on other things.)

[Opus 17]

Payment plan: You can reimburse yourself what you pay your provider, as long as the service was performed after you opened the HSA.  If you set up the plan with your provider and pay interest, that interest can also be reimbursed.  But if you pay the provider with a credit card, your reimbursement is what you paid the provider, not what you paid the credit card company (with interest).

[Opus 17]

The important facts for the IRS are,

1. The expense was for qualifying medical care.  That means, you need a statement that shows what the expense was.  Expenses for cosmetic procedures are usually not allowed except under specific circumstances.  Expenses for drugs or treatments that are not approved in the US are not allowed, even if you travel overseas where the drug or procedure is legal.  There are other rules as well.

2. The expense was for yourself, your spouse, or your dependents.  That means you need proof of whom the procedure was performed on.  A procedure performed on your wife before your marriage would not be eligible.

3. You don't claim reimbursement for expenses that were also covered by insurance.  So you need your EOB.  Your EOB may also satisfy #1 and #2, it depends.

4. The expenses were incurred (the procedure was performed) after the date you opened your HSA.

3. 

[Opus 17]

One last (dark) thought.

If you die, and your spouse is your beneficiary, the HSA becomes your spouse's HSA.  Will they know where to find your records to get tax-free reimbursement?

If you die and your spouse is not your beneficiary (like your child or sibling), the HSA converts to a regular investment account and the fair market value becomes immediately taxable to the beneficiary.  The taxable amount can be reduced if your beneficiary pays your final medical bills within 1 year, but the taxable amount is not reduced by all your old reimbursements you were saving up.

In contract, beneficiaries of 401ks or Roth IRAs get much more favorable treatment.