HSA and 401k hardship

[Bonnie]

Hi- I am at the point I am going to need to take a $8000 401k hardship withdrawal to pay medical bills. I will be paying a penalty and taxes on this  My question is, can I then deposit the money into my HSA account and reimburse myself tax free for these medical expenses?

[spiritrider]

I don't see why not. The expenses can not be reimbursed by insurance, but HSAs are not insurance. 

This would be no different than receiving a hardship withdrawal and claiming a medical expense deduction.

Of course you can't double-dip with treating the same expenses as HSA qualified medical expenses and also take a medical expense deduction for the same thing.

A hardship withdrawal is an exception to distribution rules and not a tax benefit.

[QDROphile]

Pay attention to applicable HSA contribution limits.

No comment on the essential compliance question.

[Below Ground]

I may not be understanding what you want to do, but a Hardship is not rollover eligible.  This means that when you receive the money from the 401(k) Plan, taxes will apply.  (Medical can avoid the 10% penalty, but income taxes still apply.)  You then have the money from which to pay your medical expenses.  Putting those monies, which are already subject to taxes by virtual of a 1099R from the Plan, into an HSA doesn't create a new tax deduction.  The only thing I see happening is that you then need to go through the HSA to get the money, which is money you already have in your pocket!

[Luke Bailey]

Just elaborating a little on what spiritrider and QDROphile say above, but sure. The hardship distribution will be includible in your gross income (except to extent, if any, attributable to any Roth basis), and 10% premature distribution penalty may apply if you're under 59-1/2 (but see exception in Section 72(t)(2)(B) to extent total medical expenses exceed 10% of your AGI), but the money is otherwise yours once distributed and you could use it to fund an HSA contribution and get a deduction for that, assuming you are covered by a high deductible plan and the contribution is within applicable limits.

[BenefitJack]

Couple of comments:

Can you take a loan from your 401(k)?  That would be more tax efficient than a hardship withdrawal.

Assuming you are currently participating in a HSA-capable health option, don't forget the annual maximum contribution limits, which are, in 2019: 

$3,500 (single) 

$7,000 (non-single) 

Hopefully, you opened (or your employer opened your HSA account in a prior year or at least this year prior to incurring those out-of-pocket expenses.  If not, if you haven't opened up an HSA account, those expenses may not qualify for reimbursement.  If so, don't forget that while your contributions may be limited for the remainder of 2019, if the expense was incurred after you opened up your HSA account, you can claim those expenses whenever there is money in the HSA account.  That is, kind of like the long ago ZEBRA account, you can defer more money into the HSA if you are eligible to make a HSA contribution in a future year, and use it to reimburse the expense you incurred in prior years, where the expense was incurred after opening up the HSA account but before putting enough money in to claim the reimbursement. 

Another reason for taking a loan is that it will offer you flexibility to prospectively increase your HSA contribution for the remainder of 2019 through your employer's cafeteria plan.  That may allow you to avoid not only Federal and State income taxes, but also FICA and FICA-Med.   HSA contributions can typically be prospectively increased in any future month.  And, depending on the level and nature of your employer's financial support, it may qualify you for an employer contribution. 

[dmwe]

Wouldn't the money going into the HSA account need to be pre-tax payroll deduction money? I wasn't aware that you could just deposit into your HSA any other way. ???

[Luke Bailey]

On ‎4‎/‎19‎/‎2019 at 2:00 PM, dmwe said:

Wouldn't the money going into the HSA account need to be pre-tax payroll deduction money? I wasn't aware that you could just deposit into your HSA any other way. ???

dmwe, you can make your own contributions as an individual to HSA. See IRC sec. 223(a) and Pub. 569, beginning on page 2. The amount you can contribute is reduced by whatever employer contributes under 106(d). See. IRC sec. 223(b)(4)(C).

[dmwe]

If I can make after-tax contributions to an HSA, what benefit is that? Just the tax free growth? Wouldn't payroll deduction pretax contributions make the most sense? Then my expenditures are saving me at least 20% right off the top.

 

[dmwe]

Never mind. I hadn't thought about taking the deduction on the 1040 for non-payroll deducted contributions.