How to Use an HSA to Pay Medical Bills

If you have a health savings account but not enough money to cover your medical expenses, you are not necessarily condemned to an insurmountable debt – even if you owe old medical bills.

Alexandra Wilson, a certified financial planner in Atlanta, used her HSA dues one year to cover medical expenses she incurred the previous year when she gave birth to her daughter.

She had preloaded her HSA in anticipation of her daughter’s arrival. But as so many new parents find out, Wilson ended up making extra visits to her pediatrician after giving birth.

Instead of racking up debt or dipping into her regular savings, she increased her HSA dues and used that money to pay the bills.

“You save money because you don’t have to pay taxes on that money,” Wilson said.

Want to know how you can start paying off old medical debt with your HSA? Continue reading.

How to Use an HSA to Pay Off Medical Debt

The money you put into an HSA is yours – unlike a flexible spending accountthat has an annual use-or-loss requirement.

If you (or your employer) contributed to your HSA, you may have accumulated savings. Here’s how to find out if you can use that money to pay off an old medical debt.

If you currently have an HSA

Using your HSA to pay off old medical debt depends on the answer to one question: Did you incur the debt before creating your HSA?

If the answer is “yes”, you cannot use the HSA.

If the answer was “no”, you can.

Let’s say you contributed $100 per month to your HSA for a year. You have $1,200 in the account when you break your arm and go to the ER.

You end up being billed for $2,000, which is $800 more than what 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 HSA contributions to make monthly payments on your bill for the next eight months – the good news is that most health care providers will agree to payment plans.

With older debt, it might not be as simple as swiping your HSA card, especially if you originally paid the bill with a credit card.

You may need to call your HSA provider and provide receipts to get approved. Assuming you get approved, you would essentially reimburse yourself from your HSA.

You will need to report all HSA distributions on the tax form 1099-SA when you file your tax return. But as long as you used the money for medical expenses, those distributions aren’t taxable.

If you have had an HSA in the past

Let’s say you worked for an employer who offered you a high-deductible health plan and you added money to the HSA. Then you found a new job (or changed plans) and purchased health insurance that was not deductible. What happens to your HSA?

“You can still keep using your HSA — you just can’t contribute to it until you have a high-deductible health plan,” Wilson said.

This means that you can use savings from a previous HSA to pay for this year’s medical bills or other old medical debts, as long as you incurred those expenses after opening the HSA.

And what happens to the money you don’t use?

This account is valid forever and can be used to pay future medical expenses. Once you turn 65, you can use your HSA money for non-medical expenses. You will pay taxes on non-medical withdrawals, just like you would with a 401(k).

However, if you leave your current employer or change health plans, your HSA may charge you a monthly administrative fee. Fees vary by plan, but are typically $5 per month or less. They are usually waived if your HSA balance is over a certain amount (usually $1,000-$5,000).

If you reach the plan’s minimum savings threshold, you will be able to invest the money in your HSA so that the funds in your account can increase.

Which means HSA could help you stay physically and financially healthy for a long time.

Tiffany Wendeln Connors is associate editor of The Penny Hoarder.

Rachel Christian, Certified Personal Finance Educator and Senior Writer for The Penny Hoarder, also contributed.