What is the recommended way to model paying for LTC expenses using the HSA balance?
Is it to enter a series of scheduled LTC expenses and a matching series of scheduled qualifying HSA withdrawals?
Since LTC expenses are normally tax deductible (but not when paid from the HSA), and there is no field for ‘‘% of LTC expenses paid with pretax $”, should I enter them as a Miscellaneous Expense as a workaround?
If the HSA has insufficient balance, how can I ensure that the portion of the LTC expense not paid from the HSA becomes tax deductable?
Inflation: what is the best way to ensure the same inflation rate is applied to both the LTC expense and the matching HSA withdrawal?
Timing: is there a way to tie both the expense and the scheduled HSA withdrawal to each spouse's longevity, so that they will shift automatically during "what if" analysis?
Yes, I would use the HSA as a series of scheduled withdrawals coinciding with the timing of the LTC needs.
I did not realize that if you use the HSA for a medical expense, you can't itemize that medical expense, but it makes sense and I see it on H&R Block's webpage, so presumably it's true. Pralana doesn't know about that either - it makes no attempt to match up your HSA withdrawals vs. the use so it is giving you the tax deduction. I think you would have to do some manual work to figure out what the tax impact of losing the deduction would be and then make your HSA withdrawal a mix of Qualified Withdrawals and Non-Qualified Withdrawals from the HSA to roughly match the tax impact.
If you have some saved up receipts for things like Medicare premiums or miscellaneous medical cost, you could use those in the year of LTC and get the cash without losing the deduction. Since HSAs are not friendly to non-spousal heirs, it's a good idea to have some kind of plan to use it up.
I prefer to enter all medical expenses paid from the HSA as miscellaneous expenses with matching qualifying withdrawals from the HSA. This way the combination of expense and withdrawal is tax neutral regardless of whether or not we itemize.
I may have misunderstood the question, but the way I've done it is to simply enter scheduled "qualified HSA withdrawals", meaning not taxed, into the cash account for whatever years I'd like to use it and the amount. If HSA funds are depleted, it automatically pulls from cash to cover expenses, and then pull deficits from the account order back to cash. Record expenses with the right type (i.e., medical or long term care) so that taxation is applied correctly. I haven't noticed any issues w/ doing it this way.
The issue the OP was having is that if you enter Long Term Care expenses in Pralana, Pralana automatically treats the expenses as tax deductible.
However, the tax rules are that any medical expense paid by the HSA make the expense not eligible for a tax deduction. The IRS doesn't want you getting two tax benefits (tax free HSA withdrawal and a tax deduction) for the same expense.
Pralana doesn't know that a particular HSA withdrawal is to be used for that purpose, so if you do an HSA withdrawal to cover the an itemized medical expense, Pralana allows you to do it wrong and select that it's a qualified withdrawal and still take a deduction of the medical expense, which is not allowed.
However, I wouldn't recommend trying to do anything about it in the program, I think it would be way too hard on both the programmer and the user to try to figure out exactly what which HSA withdrawal matched up with what medical expense. For instance, it would be perfectly fine to make an HSA withdrawal in the year of LTC expenses to reimburse yourself for past medical expenses or Medicare costs and still get the full deduction for the Long Term Care - in fact it would be a good idea because medical receipts that you haven't used to reimburse yourself from your HSA fly away to heaven when you do (your spouse can use the account, but not your old receipts after you pass).
Maybe they could include something in the manual to educate folks on the rules, but most folks don't read the manual, so not sure it would do a lot of good.
The bottom line is it's not all that attractive to use the HSA funds for Long Term Care if you have another way to spend down the HSA.
Thank you @ricke. I had totally missed the intent of the question. I haven't modeled (or considered) HSA funds for LTC, so I somehow just short circuited to "health care expenses".
Follow-up: I just reduced my rates of return as a "sensitivity analysis" and as a result, the HSA is depleted and has insufficient balance to cover all my "planned expenses" such as medicare premiums, copays, and ltc expenses. Of course in the real world, this means that these expenses would become tax-deductible. However, the way I model things in Pralana (online) now is to have them as regular expenses, to avoid a double deduction. What I would like is that if the HSA balance is insufficient, the scheduled withdrawals automatically come from general funds (and automatically become tax deductible). Does anyone have a suggestion for how to model this in Pralana (online)?
