I have an HSA (HSA #1) established and funded starting in 2015. It has $5,000 in it that has accumulated from 2015 to 2018. I lost HDHP coverage through employer in 2018 and did not have HDHP insurance for 9 months. So no HSA contributions. No reimbursements made since January 2018.
I gained another HDHP coverage through employer recently and established another HSA (HSA #2). There have been a few months worth of payroll deductions and it now has $800. Expected to be $2,000 at year end. Residency state is NC, if that matters.
I have some Qualified Medical Expenses (QME) from January 2018 through today worth $2,000, of which $600 were incurred after HSA #2 was established and funded.
HSA #1 is great (stock investment, no fees, etc.); HSA #2 is not good (monthly fees, no interest, no investment options). I will close HSA #2 as soon as I switch to non-HDHP plan next year. This will incur transfer fees unless I zero out the balance and close the account.
Question: Can I reimburse from HSA #2 all of the $2,000 of QME without having to pay a penalty on my taxes? (HSA established/funded issue.)
Yes, you can reimburse your qualified medical expenses incurred in 2018 (if fact, any incurred after the establishment of HSA #1) from either of the HSA accounts without doing any rollovers or transfers. Since you had an nonzero HSA balance at some point in the 18-month period prior to opening HSA #2 (you apparently never had a nonzero balance in HSA #1), your HSA establishment date of HSA #1 carries over to HSA #2. See IRS Notice 2008-29 Q&A-41:
https://www.irs.gov/pub/irs-drop/n-08-59.pdf
This doesn't seem possible unless you roll the funds from the first HSA to the new one ...
From the IRS :
For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses. State law determines when an HSA is established. An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established.
https://www.irs.gov/pub/irs-pdf/p969.pdf
Thank you! This is very helpful!
Would my HSA established date for HSA #2 be considered as 2015, if I roll over $1 from HSA #1 to HSA #2? (There is no charge on HSA #1 to rollover -- full or partial rollover.)
Current residency is NC, although HSA #1 was established and last funded in KY, before moving to NC.
Yes, you can reimburse your qualified medical expenses incurred in 2018 (if fact, any incurred after the establishment of HSA #1) from either of the HSA accounts without doing any rollovers or transfers. Since you had an nonzero HSA balance at some point in the 18-month period prior to opening HSA #2 (you apparently never had a nonzero balance in HSA #1), your HSA establishment date of HSA #1 carries over to HSA #2. See IRS Notice 2008-29 Q&A-41:
https://www.irs.gov/pub/irs-drop/n-08-59.pdf
Perfect! Thank you very much! I would have never found this without your help!
@dmertz Thank you for your response, I was able to discover this IRS article from your message. I have a similar scenario, except that my first HSA (opened 01/2018 in AZ) had 0$ balance and had to close my account on 02/2019. I opened a second HSA account and funded on 12/2019 (in VA). Since the IRS article mentions only about 0$ balance and does not mention about HSA account being open or closed for that 18 month clause, can i assume my scenario satisfies this clause for HSA established date of backdating to my first hsa account date and reimburse my qualified expenses between 02/2019 and 12/2019 ?
Read question 41 of IRS notice 2008-59.
If an account beneficiary establishes an HSA, and later establishes another HSA, any later HSA is deemed to be established when the first HSA was established if the account beneficiary has an HSA with a balance greater than zero at any time during the 18-month period ending on the date the later HSA is established.
Example 1. An account beneficiary established an HSA on March 1, 2007. On June 15, 2007, he withdrew all the funds from the HSA, resulting in a zero balance. On November 21, 2008, he established a second HSA. Because the second HSA was established within 18 months of June 15, 2007, the second HSA is deemed to be established on March 1, 2007.
Thanks for your response @Opus 17 . I read that question 41 in IRS article, it does not specify about the HSA account being open or closed though, it only mentions about the 0$ balance. Does that mean, account status (open/closed) does not matter - seems to be open for interpretation.
Exactly, the notice does not differentiate between an open account with zero dollars and a closed account because it is not relevant. If you had an account (#1) with a non-zero balance during the 18 months prior to opening account #2, then the establishment date of account #2 is deemed to be the date of account #1.
NJ007, you haven't provided sufficient information to determine if your original 1/2018 establishment date carries over to the new HSA that you first funded in 12/2019. That period spans more than 18 months and you have not said when your earlier HSA account balance reached zero. As long as you had an HSA balance greater than $0 after 6/2018, you would have had a $0 balance for less than 18 months and your 1/2018 establishment date would carry over to your new HSA account. With an establishment date of 1/2018, any otherwise unreimbursed qualified medical expenses that you did not claim on Schedule A that you incurred after the establishment of the HSA in 1/2018 could be paid from your new HSA, not just the ones incurred after the closing of your original HSA.
Thanks for your response @dmertz To clarify,
1. I opened and funded my first HSA on 1/2018 in AZ and had balance >0$ until 01/2019
2. reached 0$ balance on 02/2019 and closed account on same month.
3. opened second HSA account in VA on 12/2019 and funded on same month and have >0$ balance now
I hope AZ and VA state laws follow the 18 month clause for me to be eligible. Also, I called up my HSA account provider to clarify on this rule, but they said i am not eligible to reimburse for expenses made before 12/2019 (assume they are not aware of this IRS rule)
Since you had a $0 balance for less than 18 months, your HSA establishment date remains 1/2018.
As far as I know, California is the only state that does not recognize HSAs.
Federal law as interpreted by the IRS, not state law, defines qualified medical expenses with respect to HSAs.