How to Use an HSA to Pay Off Medical Debt — Even Bills Sent to Collections
If you have a Health Savings Account but not enough money to cover your medical expenses, you are not necessarily doomed to insurmountable debt — even if you owe on old medical bills.
Alexandra Wilson, a Certified Financial Planner in Atlanta, Georgia, is using her HSA contributions this year to cover medical bills from when she gave birth to her daughter in 2019.
She front-loaded her HSA at the beginning of last year in anticipation of her daughter’s arrival in November. But as so many new parents discover, Wilson ended up making additional visits to her pediatrician post-delivery.
Instead of racking up debt or digging into her regular savings, Wilson increased her HSA contributions this year and is using that money to pay off the bills.
“You’re saving money because you’re not having to pay taxes on that money instead of just paying out of your checking account,” Wilson said.
Want to know how you can start paying down old medical debt with your HSA? Read on.
How to Use an HSA to Pay Off Medical Debt
Money that you put into an HSA is yours to keep — unlike a Flexible Spending Account, another health expense account, which has a use-it-or-lose-it annual requirement.
If you (or your employer) have contributed to your HSA, you may have some savings built up. Here’s how to know if you can use that money to pay off old medical debt.
If You Currently Have an HSA
Using your HSA to pay off old medical debt is dependent upon the answer to one question: Did you incur the debt after you set up your HSA?
If the answer is “no,” you cannot use the HSA.
If the answer was “yes,” you can.
Even if your medical debt is in collections, you can make payments using your HSA card — just ensure you have enough money on your HSA card to cover the expense.
Let’s say you’ve been contributing $100 a month to your HSA for one year. You have $1,200 in the account when you break your arm and go to the emergency room.
You end up getting a bill for $2,000, which is $800 more than you have in your account. Don’t panic.
You can use the $1,200 you’ve already saved to pay part of your bill, then use your regular $100 contributions from the HSA account to make monthly payments on your bill for the next eight months — the good news is that most healthcare providers will agree to payment plans.
But depending on how long ago you incurred the debt, it might not be as simple as a swipe of your HSA card, particularly if you initially paid the bill using a credit card.
“If you try to swipe the card or do an online payment somewhere that is not already pre-approved to be used for HSA, they’ll typically deny it, so you might have to end up calling and working with the representative,” Wilson said. “But as long as you have your receipts showing that your bill was $500, it’s easier to prove that expense was actually a medical expense.”
Additionally, because you must report HSA withdrawals, which show up on tax form 1099-SA, using your HSA to pay off old medical debts could affect your taxes.
“What you might end up needing is an addendum to your tax returns, depending on how big this is, which could be an administrative headache,” Wilson said. “It wouldn’t be impossible, just difficult.”
If You Had an HSA in the Past
Let’s say you used to work for an employer that offered you a high-deductible health care plan and you added money to the HSA. Then you got a new job (or switched plans), and you signed up for health insurance that wasn’t high deductible. What happens to your HSA?
“You can still continue to use your HSA — you just can’t contribute to it while you don’t have a high deductible health plan,” Wilson said.
The HSA annual contribution limits for 2020 are $3,550 for individuals and $7,100 for family coverage.
That means you can use savings from an old HSA to pay for this year’s medical expenses or other old medical debt, so long as you incurred that expense after you opened the HSA.
And what happens to the money you don’t use?
“It’s a kind of longer term savings vehicle,” she said. “Eventually you can invest the money that’s in there and let it grow over time so now you have lots of tax-free money to use for medical expenses, especially as you get older.”
Which means that HSA could help keep you physically — and fiscally — healthy for a long time.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.