Can HSA Be Used for Cosmetic Surgery?
Navigate the complex rules of using your Health Savings Account for cosmetic surgery, understanding what qualifies and what doesn't.
A Health Savings Account (HSA) is a tax-advantaged savings and spending vehicle for healthcare costs. This account allows for pre-tax contributions, tax-free growth through investments, and tax-free withdrawals when used for qualified medical expenses. HSAs are available to those enrolled in a high-deductible health plan (HDHP), offering a way to save for medical needs while benefiting from tax advantages.
Understanding Qualified Medical Expenses
A “qualified medical expense” includes costs primarily incurred for the prevention or alleviation of a physical or mental defect or illness. The Internal Revenue Service (IRS) broadly defines these expenses. Examples include doctor visits, prescription medications, dental care, and vision care, such as eyeglasses or contact lenses.
The Cosmetic Surgery Exclusion
The IRS excludes expenses for cosmetic surgery from the definition of qualified medical expenses. This exclusion applies to any procedure primarily directed at improving appearance that does not promote the proper function of the body or prevent or treat illness or disease. Procedures like facelifts, hair transplants, liposuction, and teeth whitening are not eligible for HSA funds.
When Cosmetic Surgery Qualifies
Despite the general exclusion, cosmetic surgery can qualify as a medical expense under specific circumstances. If the surgery is required to ameliorate a deformity, it is a qualified expense. This includes deformities from a congenital abnormality, a personal injury, or a disfiguring disease.
For example, reconstructive surgery following a severe accident that causes disfigurement or a procedure to correct a birth defect like a cleft lip or palate qualifies. Breast reconstruction surgery after a mastectomy for cancer is eligible as it addresses a disfiguring disease. The determining factor is whether the procedure is medically necessary to restore normal body function or correct a condition resulting from illness or injury, rather than solely for aesthetic enhancement.
What Happens With Non-Qualified Distributions
Using HSA funds for non-qualified medical expenses has financial consequences. If an account holder takes a distribution for a non-qualified expense, the withdrawn amount becomes taxable income for federal tax purposes in the year of distribution.
Non-qualified distributions incur an additional 20% penalty tax if the account holder is under age 65. For example, a $1,000 non-qualified withdrawal could result in $200 in penalties, plus regular income tax. Account holders must maintain records, such as receipts, to substantiate that all distributions were for qualified medical expenses, especially during an IRS audit.