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A new bill was introduced on 11/20 in Congress to amend some HSA rules. It still has to go through the Ways and Means, House and Senate.
I doubt it will get through this year, but it’s good to be aware of potential changes.
If enacted, all the changes would go effective after December 31, 2025, but it’s very unlikely.
In particular, there are 2 main proposals:
> Income limits
> 2 Year rule
Currently, there is no income limitation to contribute to an HSA. This makes it an effective tax strategy for high earners to lower their taxes.
The new proposed bill would create an income limitation where if you make more than $240,000 (single) or $340,000 (married jointly) you will get $0 deduction for contributing to an HSA.
The contribution deduction would phase out if you make more than $200,000 (single) or $300,000 (married jointly).
In addition, currently, the HSA contribution submitted via payroll, isn’t subject to the 7.65% FICA tax.
The proposed bill would change that and you contributions would be subject to the FICA tax.
The proposed bill would also change the rules so you can only reimburse yourself for expenses if you do it within 2 years of paying the expense. Any reimbursement after the 2-year window will no longer count as a qualified medical expense.
This rule would apply to expenses paid or distributions made after Dec 31, 2025.
The bill also adds new substantiation rules for HSA distributions, requiring that expenses be properly documented before they qualify as tax free (hopefully you’ve done that before anyways)
HSA trustees will also be responsible for determining whether distributions are adequately substantiated.
So, what do we do now? Nothing. I suggest business as usual, but continue monitoring the progress on this.
If this ever does become law, it might be wise to reimburse yourself for all the prior expenses before this passes.
What are your thoughts on this?
Here is another reason not to save up HSA expenses–I would think they are an auditable item in the year you reimburse them. If you reimburse them right along, there is not such a huge audit risk in any particular year, and the audit risk rolls off a bit year by year as the 3 year and 7 year windows pass.
Here’s a link to an article critical to the proposal that goes into some depth: https://thecollegeinvestor.com/69515/house-democrats-propose-misguided-hsa-reforms/
I maxed out contributions and kept medical reciepts since I first contributed to the HSA back in the early 2000’s. Over the years, we did use the HSA for some dental implants, but basically, this was a retirement investment account.
So, with about $50k in the account when I retired, my wife and I enrolled in a “high deductible G” Medicare supplement. When my wife passed, I knew I needed to drain the account to avoid my kids being taxed. I have been taking funds from the account, supported by all those receipts, to fund everyday living expenses. Withdrawals from my IRA are only for Roth conversions. I also traded the 12 year old SUV for a 3 year old pickup and paid the difference from my HSA, again, supported by all those receipts.
Once you start receiving Social Security, you can use your SSA-1099 as proof of paying your Medicare Part B premiums, and reimburse yourself for those amounts.
We are using our HSA to pay for our Federal part B premiums and and our dental expenses since as you mentioned we know that any funds left over would be inherited at our passing and would be taxable at our children’s’ tax rate. That is unlikely as despite having a fair amount in the account we are only 67 yo.
Good to know. Thank you for the heads up.
As for using up my HSA contributions, I plan on using them to pay for Medicare premiums. I can use them to pay for parts A, B, C and D. I have enough in my account to cover around 10 years’ worth of Medicare premiums, not including any out of pocket expenses.
Tshort,
Please be aware that you can only use your HSA to pay your Federal part B premiums, and not any other premiums such as supplement, or part D.
David, you’re right on the money that Medicare Supplement premiums can’t be paid or reimbursed by an HSA.
But I believe Part D (and even Medicare Advantage) premiums can be. How Your HSA Can Reimburse You for Medicare Premiums and Expenses | Kiplinger
I take a distribution every With the IRMA inflated Medicare premiums and the high cost dental/medical costs with aging this provides a nice Xmas “bonus”. It’s a great investment vehicle – altho at death any remaining balance is fully taxable. Another reason to use it up before you are.
For those that have difficulty with their HSA and unreasonably strict verification processes for expenses, I moved mine to Fidelity. They give you a debit card and that has been the end of any hassles. Of course I keep good receipt records in case the IRS ever wants to look at things, but this was a good move for me.
The bill has no cosponsors and is authored by one of the more liberal Democrats in the House (Lloyd Doggett from my home state of Texas). So it does not currently appear this bill has any traction in a Republican-led majority controlling the calendar.
Bogdan, I’m confused by this sentence:
If this ever does become law, it might be wise to reimburse yourself for all the prior expenses before this passes.
Did you possibly mean: If ever this seems likely to become law,…. ?
I’ve only had one cup of coffee so far this AM, so maybe it’s just me.
Thanks
Thanks for the heads up, Bogdan. We will keep track of this b/c part of it affects us. Chris.
Americans have a talent for making health care complicated and confusing but never considering actual solutions that are simple and viable and this is another example.
I just finished using the funds in form of HSA funded by me and my employer while working. My contributions were after tax, but employer money and earnings were tax free.
The administrator was unnecessarily strict when verifying claims using their debit card. Claims would come directly from a dentist or doctor’s office and they still asked for more documentation. If they didn’t get it soon enough, they would freeze your debit card.
This was especially annoying because it was my after tax money.
My point is new substation rules will turn people off to using HSAs and make it more costly to administer.
I wonder if there is any evidence of significant abuse to make this necessary or is it just another wild assumption. The current view in Washington about paying for healthcare is trying to take us in a very flawed direction.
None of us can predict the future of course, so we make reasonable projections, and make financial decisions based in part on the rules. It is frustrating when the government later changes those rules.
…requiring that expenses be properly documented before they qualify as tax free…
Which entity would the onus to check fall on? The administrator of the HSA? The tax preparer?
How much would the SS trust fund benefit from the additional payroll tax?
I don’t have a problem with either the income limits or the two year limitations for reimbursements.
The took away the “Stretch” IRAs for inherited beneficiaries, so I expect this to eventually happen for HSA holders.
This is the most annoying part of it for me: “The proposed bill would also change the rules so you can only reimburse yourself for expenses if you do it within 2 years of paying the expense. “
I have unclaimed expenses going back to 2019, almost $18,000 worth at the moment. That money is growing nicely in VTI, and I’d prefer to leave it there.
Agree, David. I learned about this on HD and we did for the last 9 years before retirement. Ugh! Chris
But you see, doing what you are doing is the reason we get law changes like this. The purpose of the HSA is to allow people to pay for health care, to make it more “affordable” so to speak, not to grow an investment.
Even if you are growing it to pay for health care in retirement like we are doing? Chris
Chris, If I’m reading this correctly, the change only limits the time period for reimbursement to 2 years. You will still be able to invest un-used contributions for future expenses.
That’s the way the taxman sees it. Also, most middle class workers can’t afford to deal with high deductibles and let the HSA grow at the same time.
I would have very much liked to have had my RMDs grow too, but no dice.
Dick, yeah, I get that most middle class workers can’t afford to deal with high deductibles and let the HSA grow at the same time. We were not able to do until the kids were out of the house and we had paid off our mortgage. Chris