Can I Borrow From My HSA and Pay It Back?

Health Savings Accounts (HSAs) offer a distinctive way to save and pay for healthcare expenses. These accounts combine tax advantages with a dedicated savings vehicle for medical costs, supporting both immediate and future health needs. Many people consider using HSA funds for various purposes, often leading to questions about whether money can be “borrowed” from an HSA and later “paid back.” Understanding the specific rules governing these accounts is important for financial planning and tax compliance.

HSA Basics and Contributions

A Health Savings Account is a personal savings account designed for healthcare costs. To be eligible for an HSA, an individual must be covered by a High Deductible Health Plan (HDHP), not be enrolled in Medicare, and not be claimed as a dependent. An HDHP for 2025 must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. Additionally, the out-of-pocket maximums for these plans cannot exceed $8,300 for self-only coverage or $16,600 for family coverage in 2025.

Contributions to an HSA can be made by the individual, an employer, or other persons. If contributions are made through payroll deductions, they are pre-tax, excluded from taxable income and not subject to Social Security or Medicare taxes. Direct contributions made by an individual are tax-deductible, even if the individual does not itemize deductions.

The Internal Revenue Service (IRS) sets annual limits on HSA contributions. For 2025, the maximum contribution is $4,300 for individuals with self-only HDHP coverage and $8,550 for those with family HDHP coverage. Individuals aged 55 and over can make an additional “catch-up” contribution of $1,000 per year. These limits apply to the total contributions from all sources, including employer contributions.

Understanding HSA Withdrawals

Funds held within an HSA are owned by the account holder and can be withdrawn at any time. However, the tax treatment of these withdrawals depends on how the funds are used. Withdrawals used to pay for qualified medical expenses are tax-free. These expenses are defined by the IRS and include medical, dental, and vision costs, such as doctor visits, prescriptions, eyeglasses, and certain over-the-counter medications and menstrual products.

The IRS provides guidance on what constitutes a qualified medical expense in Publication 502, “Medical and Dental Expenses.” Examples of qualified expenses include ambulance services, bandages, crutches, hospital care, laboratory fees, and surgery. It is the account holder’s responsibility to determine if an expense is qualified, and keeping records, such as receipts, is important to substantiate tax-free withdrawals.

If funds are withdrawn from an HSA for purposes other than qualified medical expenses, these are considered non-qualified withdrawals. Such withdrawals are subject to income tax at the individual’s ordinary income tax rate. If the account holder is under age 65, non-qualified withdrawals incur an additional 20% penalty tax. This penalty highlights that HSA funds are not intended for general spending or as a personal loan.

It is important to understand that HSA withdrawals are not loans in the traditional sense. Once funds are distributed from an HSA, they are considered spent, and there is no formal mechanism or obligation to “pay them back” to the account. The IRS views these as distributions, and their tax implications are determined at the time of withdrawal based on their use. This contrasts with a loan, which involves a repayment schedule and interest.

Treating Returned Funds as Contributions

There is no formal IRS concept of “repaying” a previous HSA withdrawal as if it were a loan. If an individual withdraws funds from an HSA and later deposits money back into the account, that deposit is treated as a new contribution, not a repayment. This means the deposited amount will count towards the annual contribution limits for that tax year.

For example, if an individual takes out $500 from their HSA and later decides to put $500 back, that $500 is subject to the same contribution rules as any other new money added to the account. It must fit within the individual’s annual contribution limit for the year the deposit is made. If the individual has already contributed the maximum allowable amount for the year, depositing additional funds could result in an excess contribution.

These new contributions, like all other eligible contributions, may be tax-deductible. The deductibility depends on the individual’s eligibility to contribute and whether the contribution falls within the annual limits. This approach underscores that an HSA is a savings and investment vehicle, not a revolving credit line.

An exception related to moving funds between HSAs is the indirect rollover rule. An individual can withdraw funds from one HSA and deposit them into another HSA within 60 days to avoid tax consequences, but this is limited to one such rollover every 12 months. This rule is for transferring funds between accounts, not for “repaying” money that was previously spent on non-qualified expenses. If the 60-day deadline is missed, the funds may be considered a taxable distribution subject to income tax and potential penalties.

Tax Implications of HSA Activity

Health Savings Accounts offer a “triple tax advantage” for healthcare expenses. First, contributions made to an HSA are tax-deductible or pre-tax through payroll deductions, reducing taxable income. Second, any investment growth within the HSA accumulates tax-free. Third, withdrawals used for qualified medical expenses are entirely tax-free.

When funds are withdrawn for non-qualified expenses, the tax advantages are reversed. Such distributions are included in the account holder’s gross income and are subject to ordinary income tax. If the account holder is under age 65, an extra 20% penalty tax is imposed on the amount. This penalty aims to discourage the use of HSA funds for non-medical purposes before retirement age.

Maintaining eligibility for an HDHP is important for continuing to make tax-deductible contributions to an HSA. Eligibility is determined monthly. If an individual loses HDHP coverage or gains disqualifying coverage, they may no longer be able to contribute to their HSA for those months.

Upon reaching age 65, the rules for HSA withdrawals become more flexible. While withdrawals for qualified medical expenses remain tax-free, funds can also be used for any other purpose without incurring the 20% penalty. However, distributions used for non-qualified expenses after age 65 are still subject to ordinary income tax, similar to withdrawals from a traditional IRA or 401(k). All HSA activity, including contributions and distributions, must be reported to the IRS on Form 8889, “Health Savings Accounts (HSAs).”