Distributions from an HSA used exclusively to pay for or reimburse qualified medical expenses of the account owner or the account owner's spouse or dependents are excludable from gross income. Can a distribution from an HSA used to reimburse a third-party who directly paid the health care provider for qualified medical expenses qualify for this tax-favored treatment? In other words, if an account owner's former spouse pays for the dependent child's doctor visit, can the account owner take a tax-free distribution from his HSA in order to reimburse the former spouse for the expense?
Thank you for your responses. It is truly an HSA with the account owner participating in an HDHP. Neither the employer nor the trustee of the account is responsible for verifying that the distributions were for qualified medical expenses, but the account owner must be able to account for his distributions if audited by the IRS. The ex-spouse will have spent the money on a doctor bill of the dependent child of the HSA owner, so the expense would have been a qualified medical expense if paid directly by the HSA owner. However, the issue is whether the HSA owner's reimbursement of the ex-spouse for the expense also qualifies as a qualified medical expense. My initial thoughts were in line with what JSB wrote, "Because the employee will reimburse the ex-spouse, the expense becomes that of the employee." However, my concern was in line with the first sentence of GBurns' comment, "The employee would be reimbursing the ex-spouse for a loss/expenditure but it would not be a reimbursement of medical expenses." My question to GBurns is with respect to the second sentence, "It is reimbursement of a personal loan." If we consider it to be a reimbursement of a personal loan, isn't the argument that the loan was used to pay medical expenses that are qualified medical expenses for purposes of section 223? Does anyone have any additional insight or any sources of authority for this issue?
Does the HSA require that the expense be PAID for or INCURRED before reimbursement can take place? If PAID, I'll agree that there may be a documentation problem, but would still argue that the pass-through-the-spouse arrangement should be acceptable. If the standard is INCURRED, I don't see that there is any problem; I've been doing this for years in FSA world with my ex. Granted we've had to go back to medical providers a couple of times for clean copies of bills, but that's just to make sure that I can provide "clean" documentation to the TPA. I see no difference (though can't provide a cite) between my standing with the ex in the doctor's office and each handing over a hundred bucks, or having either one of us pay the full $200 and collect the hundred from the other party ... as long as there is reasonable documentation of the expense. (Ever been with a group to a restaurant where you threw your $10 in the pot and someone else put the whole thing on their credit card? Did you pay for your lunch? Of course you did. What if you gave your friend the $10 when you got back to the office. Did you pay for lunch? Yes, you incurred an expense for lunch and then paid for it.)
Yes but, the person paying the loan is not the person paying the medical expenses. And I do not think that "conversion" would be acceptable. Maybe an experienced tax practitioner will weigh in on this and the below analogy.
The problem with the jsb example lies in the documentation, namely the check or credit card receipt that the ex-spouse used to pay the Dr. The Dr. now has "Paid" showing on the account and there is a hard copy showing who paid. Regarding the other jsb example, If I throw my $10 towards the restaurant tab but 1 of the party pays the full bill, I generally would not be able to nor allowed to deduct anything on my tax return even if this was a business lunch.
Here is the analogy from Tax school.
Jim has a dry cleaning service. Jim's girlfriend (ex-spouse, or otherwise) Jill has a restaurant.
Jill is having cashflow problems and cannot afford to pay for the supplies that she needs to operate the restaurant. So Jim, being of kind heart, pays the bill from the supplier.
Jill's restaurant cannot deduct this amount as an expense, because Jill's restaurant did not make the payment.
Neither Jim nor Jim's dry cleaning service can deduct the amount as an expense, because not only did neither receive the goods, also neither incurred the expense and additionally it does not meet the requirements of Section 162 as an ordinary or necessary business expense. It will be treated as either income from the dry cleaning service to Jim or as a loan to a third party.
You might now say that when Jill's restaurant repays the amount, then it will be able to deduct the amount as an expense. But that will not be the case, because there is no invoice to pay, no goods that will be received etc.
It will be an expenditure but it will not be an expense.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
Then request a new bill from the doctor, pay your half, and ask the doctor to refund the money to the ex. (or for GB, get a bill from the office supply house, pay it - and deduct it - and have them credit Jim's account for his "extra" payment.)
Or pay all of the next medical bill. Or the next medical bill ... or the next one ... the HSA money will remain available to be spent in the future, if necessary.
I bet that you cannot get your office supply store to do that. Any merchant who tracks inventory through their invoicing system would find it impractical to do what you suggest. That is why your supermarket or large retail store scans in a return item even if you are doing an even exchange, the inventory control and re-ordering system dictates it.
Paying the next medical bill does not help the ex-spouse to get back her money.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
Oh Jimminy Crickets!! None of this affects reimbursing the spouse. If this ex is like mine, you reimburse first and figure out the details later.
The issue is reimbursement of the employee with pre-tax dollars. If you deny, then the employee must use post-tax money to pay the spouse. But don't most of us already do this at the doctor's office, pay with post tax money? It's only later that we request reimbursement from the pre-tax account. But if you have to deny, at least give the employee some suggestions (like, that they pay all of the next bill) so that if the expense would otherwise qualify for reimbursement they will have proper documentation next time.
With the collective experience of the posters who live this stuff every day, we can't seem to get on the same page as to how this might work. How does some poor employee who requests reimbursement a couple of times a year stand any chance of figuring out how to properly use their benefits if we don't help them through it?