November 29, 2016 by Brad 5 Comments Richmond Savers has partnered with CardRatings for our coverage of credit card products. Richmond Savers and CardRatings may receive a commission from card issuers.
We recently discussed how medical bills provide an opportunity to earn credit card rewards, which in turn can lower your total medical expenses. It’s a really neat concept that can make an expensive situation much more pleasant and affordable. But if you have a Health Savings Account (HSA), you can actually stack even more savings to really sweeten the deal. Let’s take a closer look.
An HSA accompanies a High Deductible Health Plan (HDHP). And while HDHPs aren’t always popular with people who haven’t used them before (because they seem more expensive), they can often save you a good bit of money if you’re young and/or have limited medical expenses. They’re pretty popular in the personal finance community, and great if you prefer to self-insure rather than being forced to pay up for a large premium even if you don’t need significant care. Additionally, many employers will contribute some amount to the HSA if you opt into a HDHP, which also essentially lowers your deductible by the amount contributed.
And lastly, you can hold onto an HSA after you quit HDHP coverage. You won’t be able to add more money, but you’ll still have the chance to spend what you’ve put aside tax free.
Those are the “basics,” but what many people don’t know is that you can use your HSA to reimburse yourself after using a different payment method. Typically, your HSA issuer will provide you with a debit card, but you aren’t required to use it. What this means is that you can pay for your medical expenses with a credit card to earn rewards and then reimburse yourself from the HSA. You’ll just need to keep your receipts or other documentation to show that you paid for a qualifying expense.
Note: the example below uses tax numbers from 2016, but the concept still applies! Let’s repeat the example from our previous post about paying for medical expenses with a credit card. There we used a hypothetical $6,000 medical expense, which earned $1,178 in credit card rewards via two hypothetical credit cards with a minimum spend requirement of $6,000. If we throw an HSA into the mix, things get even more interesting.
The only drawbacks to this method are that you’ll need to keep documentation, and there may be a little work involved in processing the reimbursement with your HSA provider. Really though, those are just minor obstacles considering the potential savings.
Oh, and if you’re wondering whether this trick would also apply to a flexible spending account (FSA), the answer is YES. That can open the doors to even more “double dip” savings opportunites.
Have you ever stacked rewards and HSA tax advantages? Let us know in the comments below!
Hey Brad, it’s a great tip, you can make it even better if you save those receipts to use for self-reimbursement far in the future and allow your HSA to grow tax-free in the interim. When you decide to reimburse yourself, you’ll have had the benefit of tax-free growth and then a tax-free withdrawal, stacked on top of the CC rewards at the initial purchase.
PS–we are using your tips to go to Bermuda next year for free!
Excellent advice. I tell colleagues not to use the HSA debit card and just use credit card to get rewards on medical bills. It’s so easy to reimburse yourself online it takes less than a minute with our HSA provider. We have a baby coming up so you can be sure I’ll be trying to maximize those rewards!
Hi Brad, I wonder if you’ve ever looked at using an HSA purely as a retirement account, maxing it out and leaving the money there growing and untouched until around age 65. It requires paying your deductibles out of pocket every year while you are working, but allows this money to grow tax free for years. If you keep the unpaid receipts you can withdraw the money for those at any time (even years later), so you can use this for emergencies. Fidelity estimated in 2017 that the medical costs for a 65 year old couple “to cover health care and medical expenses throughout retirement” is $275,000. If you can save and grow that much in an HSA by 65 you’ll never have to pay taxes on the money that covers those expenses or use your other sources of income for them. In addition after age 65 you have the option to use the money for non-medical purposes without paying the 20% penalty, just paying income tax on the money in that case.
The HSA seems to be everything the 401k is and more. So my thought is if you have a 401k at work that has employer matching contributions available and an HSA without any matching, you can first contribute to the 401k up to level that gets the maximum company match, then your next retirement dollar contributions can go towards maxing out the HSA, then finally your dollars beyond the HSA annual max can go back towards maxing out the 401k.
I think you are absolutely right. When I first wrote this article, I was just understanding all the great potential of the HSA–and now I see it much more like you do, as the ultimate retirement account. That said, it is context-driven, probably. I think in some situations, it still makes sense to use it for medical expenses now, but I agree with you that the ideal situation is to use it like a retirement account. I suppose the only con is having to keep track of receipts, but that’s easy enough in our digital age. I’ll have to update the article to make sure that option is better presented and explained. Great comment–thank you!
Hi Thomas, sorry I mistook who wrote this, it’s a good article!
Agree completely about context, the HSA and especially the high deductible health plan that goes along with it is not for everyone. When you switch from a more typical insurance plan with copays to an HDHP, it can be a real sticker shock at the doctor’s office and the pharmacy when you pay full price for everything until you meet your high deductible. I’ve had pharmacists give me puzzled and apologetic looks as they were charging me around $300 for a single prescription, and I have insurance! I’m sure nearly everybody else just makes copayments. Someone who regularly goes to the doctor and/or takes prescriptions may find it’s not worth trying to build up an HSA balance while paying so much out of pocket.