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William Baldwin Contributor

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Turn Doctor Bills Into Retirement Income



(2) It compounds tax free.
(3) It comes out tax free.

The powerful tax-saving vehicle is a health savings account. An HSA is a kitty, funded by you and/or your employer, that you are supposed to use to cover deductibles and copays in a high-deductible health insurance policy.

Supposed to use, but don’t have to use. That’s the starting point for this investment scheme. Amounts you don’t draw down carry over from one year to the next, and balances can build up. You can use the account to play the stock market.

Most HSA users find themselves with plenty of medical bills to pay and spend the money almost as fast as it comes in.

But a sliver of the 9 million Americans with HSAs stuff their accounts and make no withdrawals. Even though HSAs have been around for only a decade and the ceiling on contributions has been in the neighborhood of $7,000 a year, some accounts have gotten quite plump.

HSA Administrators, an account custodian in Richmond, Va. that caters to compulsive savers, says it has many with more than $100,000. HSA Bank, a Wisconsin-based unit of Connecticut’s Webster Bank that works with both individuals and big employers, claims to have seen one balance just shy of $1 million.

To get the most out of this tax shelter you have to run up medical bills over the next several decades that, cumulatively, exceed your account balance. You also have to be aware of a peculiar rule that says you can make retroactive claims, explains Eric Remjeske, whose Minneapolis firm, Devenir, helps HSA providers design investment menus.

Let’s say you get a $1,000 doctor bill you owe because you haven’t met the steep deductible in your insurance plan. Keep your HSA debit card in your wallet, advises Remjeske. Whip out another credit card, maybe one with reward points, whose balance you scrupulously pay in full every month, for the doctor.

Now what? Put the doctor bill in a shoe box until you’re retired. The $1,000 you didn’t withdraw from the HSA has grown to, say, $3,000. Now you take the money out, and match it against the ancient bill plus $2,000 of other medical costs incurred in the meantime. In effect, you have created $3,000 of retirement income with no tax on it.

That’s as good as a Roth IRA account–no, better, because the money was deducted on the way in, a benefit not available on your Roth savings. HSA contributions from your employer, and your own, if deducted from your paycheck, never appear in your income. If you are self-employed, the HSA contribution reduces your adjusted gross income, a powerful form of tax deduction.

In justifying your HSA withdrawals you can’t claim any medical expense you have already used as an itemized deduction on your tax return. But for most people the itemized deduction is unobtainable anyway, because medical expenses count only to the extent they exceed 10% of income.

What if you are so healthy, or do so well with your investments, that your HSA tops your lifetime medical costs? That would be a nice problem to have. If it afflicts you, the triple tax shelter turns into a mere double. HSA money withdrawn after age 65 and not matched against medical costs is taxed like a 401(k) payout, as ordinary income.

But there are a lot of unreimbursed medical bills that can go into that shoe box after being paid with funds from outside your HSA. The main one that can’t is the premium to buy the high-deductible plan. Almost anything else goes in, provided that the patient was covered at the time by a high-deductible health insurance policy: copays, deductibles, doctor bills that you owe because the doctor is not in your network, braces for your kids, nursing home insurance, eyeglasses.

Once you are in Medicare, you can no longer contribute to the HSA, but you can use the money on insurance premiums, including Medicare and Medigap policies.

Is the look-back feature a loophole? Consider it a feature, not a bug. Legislators set up the system to reward patients for selecting insurance that makes them cost-conscious. If they also persuade people to save for their old age, they will defer the day when nursing home costs send Medicaid into bankruptcy.

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  • Sonny Steele Sonny Steele 1 year ago

    I’ve had an HSA since they were called Medical Savings Accounts, and this is the first I’ve heard of this “feature,” as the author calls it. I’m glad to have the information but feel the article is incomplete. There is no explanation of how one goes about justifying an HSA withdrawal with an old doctor’s bill. Does one send a pdf file to the HSA bank? Elsewhere? The author doesn’t say.

  • William Baldwin William Baldwin, Contributor 1 year ago

    You don’t need to prove anything to the custodian of the account. You need the paperwork only if you are audited.

  • Sonny Steele Sonny Steele 1 year ago

    Thanks, William. Good to know.

  • Joe Banks Joe Banks 1 year ago

    Great article. I only recently learned about HSAs and am intrigued. I’d love see a more detailed article (or links) to other resources outlining ‘how’ to do some of the things you mentioned. For example, how can I go about getting 2 HSAs? Does my spouse also need an HDHP or can she qualify under my employer plan? And if I lose my employer plan, I know I keep the HSA but am I ok to use it for medical costs (me and/or family) if I have a gap in coverage ? Oh, and is there really no limit for how long I can keep receipts an use the HSA retroactively? Is it only from point of HSA origin or further back? Who’s best to ask: financial planner, accountant or bank?

  • William Baldwin William Baldwin, Contributor 1 year ago

    Your questions are good ones and if there were more space in the magazine I would have addressed them there. To open an HSA, go online and fill out the application. Can a spouse contribute? Only if (s)he is covered by a high-deductible plan at the time; it could be your plan or his/her own. Can you use the account for deductibles incurred under a non-HDHP you enroll in later? Probably (see my answer to another comment). Can you use the money to cover expenses incurred before you opened the HSA? No.

  • alxtg27 alxtg27 1 year ago

    Thank you for this very timely article. Would a covered spouse and two dependent children be eligible for the “feature” under an HSA plan if she has no income and her husband pays the premium, pays the medical expenses and contributes to the HSA plan? They file married filing jointly.

  • Matt Granai Matt Granai 1 year ago

    Let us suppose I change jobs from one with which I had a Qualifying High Deductible Health Plan and through which I funded an HSA to one in which I now have a traditional insurance plan with a $500 deductible. Suppose I then a receive $500 bill that falls under my traditional plan deductible amount and wish to add it to the “shoebox.”

    The part of your piece that says “Almost anything else goes in, provided that the patient was covered at the time by a high-deductible health insurance policy…” seems to me to say that I cannot add this $500 bill to the shoebox because I am no longer covered by an HDHP. Is this correct. If so can you please cite the applicable Code Section?

  • William Baldwin William Baldwin, Contributor 1 year ago

    The HSA rules are somewhat murky. It’s clear that you can’t use the account to cover a bill incurred before the HSA was established. It’s not clear whether you can use the money for someone covered by a non-high-deductible plan, although you probably can. It’s not clear whether your executor can use old bills to extinguish your HSA after your death, but he probably can’t.

  • Pat Jarrett Pat Jarrett 1 year ago

    In the scenario you describe, you would be able ot add hte $500 expense to your shoebox. The medical expense was incurred AFTER you has established the HSA. The fact that you were no longer covered by the HDHP is not material. The IRS regs require that it be an eligible medical expense for you, your spouse, or your tax dependent. It must also occur after the HSA is set up and funded. Remember that many folks will be using their HSA for medical expenses they incur after they enroll in Medicare, essentially the same situation you describe. See IRS Publication 969, page 8 for confirmation.

  • Is it possible to give an example of how much one could benefit? From a financial standpoint, what is the upside of paying current medical expenses with current after-tax dollars? For example, you need to earn $1,333 dollars pre-tax (assuming a 25% federal tax rate) to pay off the $1,000 medical bill. By doing so, you forgo the opportunity to invest the additional $333 in a traditional IRA account and paying off the $1,000 medial bill with the HSA dollars. That extra $333 will compound over time. I understand you need to pay taxes on that $333 in the future, regardless of what it is spent on, but you also have to pay taxes on any health savings account dollars not used for medical expenses.
    I also think the tax rate assumptions are critical. Generally speaking, don’t people end up paying higher tax rates as they get older as they lose common deductions for things like mortgage interest and child tax credits? So are you better off investing in a ROTH IRA assuming your future tax rate will be larger?
    Perhaps this strategy makes the most sense if you are maxing out on your other tax advantaged savings opportunities?

  • William Baldwin William Baldwin, Contributor 1 year ago

    I don’t agree with your analysis. Yes, you had to earn $1,333 in order to have the $1,000. But you would have earned the same $1,333 had you dipped into the HSA, and had the same $1,000 left after taxes. There’s no $333 in a side fund.

  • Joe Banks Joe Banks 1 year ago

    I thought the advantage here was that HSAs are pretax/nontaxed & can be invested. So if I earn $1333 and put it in the HSA (either from pay deduct or claimed on taxes) then I’ve paid my $1000 bill and still have $333 compounding in my HSA. And that compounds tax free for future medical bills. Sure, I pay tax if not used for medical. Or am I just not grasping the concept.

  • If I understand your article, the premise is tax avoidance. I agree that you would have earned the same $1,333, what I am saying is you have the opportunity to put that $1,333 in an IRA, tax free and pay off the $1,000 medical bill from the HSA account, tax free. So unless you are assuming you are maxing out all of your tax avoidance / deferral methods, you are potentially spending an extra $333 by using after tax income and not using another tax deferred vehicle. In which case you would need to compare the returns on the HSA vs the IRA.

  • I been a huge fan of HSA’s for years. I tell people it’s the only qualified account that gives you a free ride on taxes both on the way in and the way out. I wondered why you said If you are self-employed, the HSA contribution reduces your adjusted gross income, a powerful form of tax deduction. I believe it does this for everyone. Maybe you were thinking of health insurance premiums, not HSA contributions. If you are self-employed, you can deduct your health insurance premiums but they are one of the expenses you cannot reimburse through your HSA account, unless you are unemployed. I like the tip about having two separate HSA’s if you are over 55. It prompted me to look at the charts and I realized you can also contribute $50 more plus the additional $1000 catch-up contribution. At age 55, you only have another 10 years that you are allowed to contribute, so why not maximize it if you can?

  • Loved the article. I’ve had HSA for about 5 years and now have $50K in my account (paying medical/rx bills out of pocket). While I intended to turn my H.S.A. into a Medical IRA (LTD, Medicaid Supp, Rx copays, etc) at retirement, I loved the shoebox idea. I hope I dont need the cash, but just in case I’m pulling all my claim data and storing it…and if I somehow need $25-$50K in a pinch 5-10 years from now, I can “reimburse” myself tax-free. Wish I had an H.S.A. when I started work 25 years ago. Keep up the good work!

  • Vin N Vin N 1 year ago

    Great Article. I moved from a PPO plan to HSA plan starting this year. The article talks about where all we can use the HSA funds. One additional question is that can the HSA funds be used against a service that the insurance company has denied? For example, I went to doctor for a specific surgery that was not covered under the Insurance plan. Will I be able to use the HSA funds for that particular service?

  • Nancy Bundy Nancy Bundy 1 year ago

    With regard to the section of the article that reads…

    Maybe open two HSAs. For 2014 the maximum contribution for a couple with a family policy is $6,550, plus $1,000 for each of them over 55. To land the second $1,000 catch-up allowance, the couple must have two accounts.

    I tired to make a “catch-up” contribution in 2013 after turning 55, but the bank where our HSA account is would not let me since I am not the “primary holder” of the HSA account. In other words my husband and I have a high deductible family insurance plan where he is the primary subscriber and I am dependent on the plan. When opening the HSA bank account we were told it had to be in the name of the primary subscriber. So now when he turns 55 in a few year then we can start making catch up contributions. So how can you have two HSA bank accounts with an insurance policy that is a family policy? This is something I can never get an answer to. Thanks.

  • I have a HSA account and never used it because I did not understand the benefits of it. Since reading this article Im considering using it. here is my question, if I deduct $120 pre-taxed from my paycheck every week into the HSA account (to total the 6K I can put in) and then use $2500 of it to cover my deductible, (I would love to use taxed $s but I cant afford both) I am left with $3740. what happens to the $ left in the HSA account? if i just leave it there from year to year it will not beat inflation and just compound. is there any way to have the HSA bank invest your money so you get some interest on it? Also, if I do use partial $ to cover my deductible, on what terms can I a few years down the road withdraw the $ from the HSA account tax free?
    Thanks again for this article!

  • This sounds like a plan for the privileged. Most young families will meet their deductible and even co-insurance max no problem. It only takes one medical event beyond a standard office visit to do that. So, every year you want people to save their $3,000 (deductible + coinsurance – let’s be realistic for today’s medical costs) in a shoe box and then pay it 30 years later? This won’t work for anyone who needs to visit the doctor for something beyond a standard physical.