You Can Pay Off Your Medical Debt with an HSA — Here’s How

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An HSA can help you maintain physical and financial health by providing a tax-free way to save and pay for medical expenses, including medical debt that has gone to collections.

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If your medical bills are keeping you up at night, you’ve got company. Over a quarter of Americans surveyed by the Kaiser Family Foundation (KFF) report someone in their household has had a hard time paying for medical bills in the last year. Many will even skip treatment because of cost.

If you can’t pay your medical bills, you incur what’s called, “medical debt”. And while this type of debt likely won’t affect your credit score at first, if the bill goes to collections, it will. Even if your provider or hospital doesn't send it to collections, you will ultimately have to pay it. Luckily you can use your Health Savings Account (HSA) to do so. Here’s how.

HSA rules

First, let’s talk about some of the important IRS rules that govern how HSAs are used.

  1. You must also be enrolled in a High Deductible Health Plan (HDHP). You must choose to enroll in an HDHP during the open enrollment period, but once you’ve enrolled in said HDHP, you can choose to open an HSA at any point during the year.

  2. You can open an HSA through your employer (if it offers one) or through the private market. Either way, you won’t have to pay federal income taxes on your contributions. However, you may have to pay state income tax on your contributions, depending on where you live.

  3. You can only use your HSA contributions to pay for qualified medical expenses. If you use your HSA for anything else, you will have to pay federal income taxes on the amount you spent as well as a 20% penalty.

  4. Any services for which you’re using your HSA must have happened after the HSA was opened.

  5. Your account balance is the maximum amount available to you. Even if you’re set up for regular monthly deposits, future contributions can only be used for medical expenses once they’ve been processed into your account.

  6. Your HSA is subject to contribution limits, set annually by the IRS.

How to pay off medical debt with your HSA

How you’ll use your HSA to pay off your medical debt depends on when you incurred your medical costs and opened your account. To see if your expense qualifies for direct payment from your HSA, look for the date of service (not the bill date) on your medical bill. If that date is after you’ve opened your account, you can use your HSA debit card or submit the payment for reimbursement.

If your medical expenses were incurred after your HSA was opened

Step 1: Determine how much you can afford. If you’ve been making regular deposits and you’ve saved enough in your account to cover your medical debt- great! Skip to Step 4. If you don’t have enough in your account to pay your entire bill, look at your finances and determine how much you can afford to pay on a monthly or quarterly basis.

Step 2: Set up a payment plan with your medical provider or the collections agency. They may charge interest on your balance.

Step 3: Fund your HSA. Make sure to deposit the amount you intend to use to pay your medical bill at least two weeks prior to the bill’s due date (check with your HSA administrator for exact processing times).

Step 4: Pay your bill. You can either use your HSA debit card or pay for it using your personal debit or credit card and then send the proper documentation to your HSA administrator for reimbursement. You can do this even if the bill has been sent to collections.

If your medical expenses were incurred before your HSA was opened

Unfortunately, you can’t use your HSA to pay for your medical debt directly but there are ways you can use it indirectly.

  • Use your HSA to pay for qualified medical expenses and put the money you would have otherwise used toward your medical debt.
  • Since HSA contributions aren’t subject to federal income tax, you could save up to 30% (depending on your tax bracket) on the services for which you pay with said contributions. Put the money you save on federal income taxes toward your medical debt.
  • If you switched to an HDHP from a more expensive plan, use the money you save on monthly premiums for your medical debt.
  • Open an HSA that allows you to invest your contributions. When your money starts to make money, put the gains toward your medical debt.
  • If you open an HSA in the private market, include your contributions on your tax returns and use any money you get back toward your medical debt.

Many Americans struggle to pay for healthcare and some will skip treatment because of cost. But delaying medical care can lead to a decline in physical health and isn’t the ideal solution to the affordability problem. Opening and funding an HSA can not only help you afford your medical care, it can help you maintain financial stability as well. If you have questions about your specific HSA, please reach out to your Human Resources department or HSA administrator.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

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