HSA receipts in another currency

[Paul der Krake]

I have some routine health expenses (< $200) that I incurred abroad that were billed in Euros.

My HSA strategy is to pay out of pocket now, keep receipts and reimburse myself in a tax-free manner in a couple years when FIREd as bridge income during my ladder years.

Do I:

1) use the exchange rate at the time of billing?
2) use the exchange rate at the time of reimbursement?
3) use nothing, it's not allowed, you dirty commie.

I couldn't find anything that said I had to spend my HSA monies in the US, but I may be wrong. Either way, this raises some interesting questions. What if the currency doesn't exist in the future? Which published forex rate should I be using? How much paperwork would be reasonable to maintain in case of an audit?

[seattlecyclone]

I'd probably go with the exchange rate at the time of billing, but I have no citation to back that up. It's such a small amount, my strategy would probably be to claim it in the first year I take HSA withdrawals and then have another receipt for a similar amount in my back pocket to claim instead if the IRS nixes the foreign charge.

[Cathy]

Based on the wording of the statute, it looks like the strongest argument would be for using the exchange rate at the time that you pay the provider, or more accurately, for using the amount of United States dollars required to pay the bill (i.e. not the notional midmarket rate). Under the Internal Revenue Code, "[a]ny amount ... distributed out of [an HSA] which is used exclusively to pay qualified medical expenses of any account beneficiary shall not be includible in gross income", but conversely, "[a]ny amount ... distributed out of [an HSA] which is not used exclusively to pay the qualified medical expenses of the account beneficiary shall be included in the gross income of such beneficiary". 26 USC § 223(f)(1), (2) (emphasis mine). Also, under the statute, the term "qualified medical expenses" means in relevant part "amounts paid by such beneficiary for medical care". 26 USC § 223(d)(2)(A) (emphasis added).

As can be seen, the focus of the test for whether an HSA distribution is included in income is on whether the distribution is used "to pay" qualified medical expenses (which are "amounts paid"). This suggests to me that the relevant question is how much USD did you actually fork over to pay the bill, or, if you didn't pay in USD, how much you would have had to fork over if you had paid in USD. This is only one argument, not a definitive conclusion. You should do your own research and draw your own conclusions. I make no comment on any other issue raised by the original post.

[Kakashi]

I did exactly that.  I took the bill, and wrote a note on the day I paid it what the forex rate on that day is and the equivalent in US dollar amount.  I also don't know if this will work.

[Hotstreak]

Do you actually need to submit your receipt for a routine withdrawal, or is this something that would only be an issue if you were audited by the IRS? 

[meg_shannon]

Are you planning on waiting years to be reimbursed for healthcare expenses? It's my understanding that you have to submit with paperwork by April of the following year (tax time basically).

[Paul der Krake]

[ well-sourced, reasonable interpretation of the law ]

Hey Cathy- good to see you posting again! I agree that this sounds like the most reasonable way to approach this. Not to tempt fate, but I expect very modest foreign health expenses before retiring and taking my distribution, so it will probably all work out in the end.

I happened to have paid in Euros with a US card since the exchange rate was so favorable. I think the Euro-denominated receipt and a copy of the credit card statement showing the USD amount charged should be plenty to satisfy an inquisitive auditor. We're all reasonable people, right? ;)

Are you planning on waiting years to be reimbursed for healthcare expenses? It's my understanding that you have to submit with paperwork by April of the following year (tax time basically).

The IRS has published guidance that greenlights deferred distributions. See Question 39 of their FAQ here:
https://www.irs.gov/irb/2004-33_IRB/ar08.html

Do you actually need to submit your receipt for a routine withdrawal, or is this something that would only be an issue if you were audited by the IRS? 

Only for an audit. Keep paper copies, keep digital copies, make backups.