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Staying healthy isn’t cheap. In fact, medical debt is the No. 1 reason for bankruptcy in the United States. And it's common to put medical expenses on credit cards, either to spread out the cost or to get a little something back in the form of rewards. But can you pay off that medical credit card debt using a tax-advantaged medical savings account like an HSA or FSA?
In short, yes, but it's important to keep good records.
Here’s what you need to know.
What’s an HSA/FSA?
An HSA, or health savings account, is a tax-advantaged savings account that accompanies many high-deductible health plans. You contribute money to the account — and your employer may choose to match part of it — and it isn’t subject to federal income tax when deposited. This account is yours to pay medical expenses or hold on to, because this money doesn’t “expire.” You can withdraw it for qualified medical expenses tax-free or withdraw for non-qualified expenses, but you’ll have to pay taxes on the latter.
An FSA, or flexible savings account, is a tax-advantaged savings account you can fund through deductions from your paycheck (provided your employer offers an FSA option). Unlike HSAs, FSAs are “use-it-or-lose-it.” However, due to an IRS ruling, you can carry over up to $500 of your contributions into the next year for 2.5 months. In other words, if you had $350 left from 2014, you could continue to use the funds until March 15, 2015. FSAs are also used to cover qualified medical expenses.
As with any tax-advantaged accounts, HSAs and FSAs both have contribution limitations. For 2014, a single person can contribute $3,300 (plus $1,000 more if you’re over the age of 55), and a family can contribute $6,550 (plus $1,000 more if you’re over the age of 55) to an HSA. Those with FSAs can contribute $2,500 a year for 2014, or $5,000 for a dependent care FSA.
Can I use my HSA or FSA to pay off credit cards?
If you put your medical expenses on your credit card for any reason — whether you want to rack up rewards or didn’t have your medical savings card available at the time — you can reimburse yourself provided the medical expense was accrued while the HSA/FSA was open. In fact, you can reimburse yourself out of your HSA years later for medical expenses you forgot to reimburse yourself for — there isn’t a time limit, but you can’t reimburse expenses incurred before you had the account. FSA reimbursements must happen in the year the expense was incurred and the funds were saved (or during the grace period/carryover).
But be very careful about accurately tracking your medical expenses and only pay that amount out of your health account. You can’t use your HSA/FSA to pay off non-medical expenses without a penalty, so keep good records and reimburse only the qualified expenses.
Beware: Your medical expense may not qualify for HSA/FSA reimbursement
While most of your legitimate medical expenses can be paid using an HSA or FSA, there are also some expenses that don’t qualify for the tax advantage that these accounts give you. For instance, non-prescription medications and supplements aren’t considered qualified expenses. Neither are insurance premiums, weight loss programs or health club dues. For a list of qualified versus non-qualified medical expenses, check out IRS Publication 502.
One more thing: Consider alternatives
Credit cards are typically the most expensive form of financing, and medical expenses can be very expensive. Many doctors and hospitals will allow you to set up a payment plan with 0% or very low interest, so consider that option before reaching for your cards.
Otherwise, you’ll want to use cash, non-retirement savings or a low-cost loan to pay your medical debt. You also may be able to withdraw 401(k) or IRA funds without a penalty, but this shouldn’t be your first option. For these early distribution rules, check here for IRA and here for 401(k).
Bottom line: You can reimburse yourself from an HSA or FSA. However, you need to make sure you keep track of your medical expenses and ensure they’re all qualified before you reimburse yourself to avoid penalties and taxes. And, of course, don’t use a credit card to pay medical expenses unless you can pay it off before accruing interest. There are much cheaper financing options available, and any earned rewards won’t outweigh interest payments.