Can I Borrow From My HSA and Pay It Back?

A Health Savings Account (HSA) provides a powerful tool for managing healthcare costs, but it functions as a savings and investment vehicle, not a personal loan. Many individuals inquire about “borrowing” from their HSA and then “paying it back,” which fundamentally misunderstands how these accounts operate under IRS regulations. Funds withdrawn from an HSA are either qualified distributions for medical expenses or non-qualified distributions, each with distinct tax implications. There is no mechanism to “repay” a non-qualified distribution to avoid taxes or penalties.

Understanding HSA Withdrawals

A Health Savings Account is a tax-advantaged account for healthcare expenses, available to individuals enrolled in a high-deductible health plan (HDHP). Contributions to an HSA are tax-deductible, funds grow tax-free, and qualified withdrawals are also tax-free. Unlike a loan, an HSA does not allow funds to be temporarily taken out and then returned.

When funds are removed from an HSA, they are considered distributions, categorized as either “qualified” or “non-qualified.” The IRS establishes guidelines for what constitutes a qualified medical expense; withdrawals for other purposes have specific tax consequences. Account holders have discretion over how and when to use their HSA funds, but must adhere to IRS rules to maintain the tax-free status of distributions.

Qualified Medical Expenses

Withdrawals from an HSA are tax-free and penalty-free at any age, provided they are used for qualified medical expenses as defined by IRS Publication 502. These expenses include a wide range of services and products for diagnosing, treating, or preventing illness, or affecting body function. Common examples include:

• Deductibles
• Co-payments
• Prescription medications
• Dental treatments (e.g., X-rays, fillings)
• Vision care (e.g., eyeglasses, contact lenses)
• Certain long-term care services or insurance premiums
• Over-the-counter medicines
• Menstrual care products

Account holders must maintain detailed records, such as receipts, invoices, and Explanation of Benefits (EOB) statements, for all expenses paid with HSA funds. These records are needed to prove that distributions were for qualified medical expenses in the event of an IRS audit. While there is no time limit for reimbursing oneself for qualified medical expenses incurred after the HSA was established, record-keeping ensures the tax-free status of these reimbursements. The responsibility for proving legitimacy rests with the account holder.

Non-Qualified Distributions

Using HSA funds for purposes other than qualified medical expenses results in “non-qualified distributions.” These withdrawals are subject to the account holder’s ordinary income tax rate. The withdrawn amount is added to your taxable income, potentially increasing your overall tax liability for the year.

Non-qualified distributions taken by an account holder under age 65 incur an additional 20% penalty tax. For instance, a $500 non-qualified withdrawal by someone under 65 would result in $100 in penalties, plus the amount being taxed as regular income. This substantial penalty underscores that HSAs are not intended for general spending or short-term loans. Once an account holder reaches age 65, the 20% penalty no longer applies to non-qualified distributions, though these amounts are still subject to ordinary income tax if not used for qualified medical expenses. Taxpayers report all HSA distributions on IRS Form 8889, which is filed with their Form 1040.