Can I Buy Over-the-Counter Medication With an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account used with a high-deductible health plan (HDHP). It allows individuals to save for qualified medical expenses on a tax-free basis, as contributions, earnings, and withdrawals for eligible medical costs are tax-exempt. HSAs help manage healthcare costs and serve as a long-term savings vehicle. The Coronavirus Aid, Relief, and Economic Security (CARES) Act broadened the scope of eligible expenses, including many over-the-counter (OTC) medications and products that no longer require a prescription for purchase with HSA funds.

Eligible Over-the-Counter Medications

Many over-the-counter medications and products are now qualified medical expenses for HSA reimbursement, a change enacted by the CARES Act. Before this legislation, most OTC items required a doctor’s prescription to be eligible, but this requirement was removed effective January 1, 2020.

Eligible items encompass products for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any part or function of the body. Common examples include pain relievers like ibuprofen and acetaminophen, cold, flu, and allergy medications such as decongestants and antihistamines, and stomach and digestive remedies like antacids and laxatives.

First-aid supplies, such as bandages, antiseptic wipes, and other wound care products, are eligible. Menstrual care products, including tampons, pads, and menstrual cups, were added to the list of eligible expenses. Diagnostic tools, like blood pressure monitors and glucose meters, also qualify. Sunscreen is eligible if it meets IRS guidelines, generally requiring an SPF of 30 or higher and broad-spectrum protection.

Ineligible Over-the-Counter Items

While the range of HSA-eligible items has expanded, many common over-the-counter or health-related products remain ineligible for reimbursement. These items are not considered primarily for medical care, as defined by the Internal Revenue Code Section 213. Understanding these exclusions helps account holders avoid potential tax penalties for using funds on non-qualified expenses.

Cosmetics and toiletries, such as makeup, shampoo, toothpaste, skincare lotions, and deodorants, do not qualify. Products for general health maintenance, like vitamins and dietary supplements, are ineligible unless a medical practitioner recommends them to treat a diagnosed medical condition.

Fitness equipment, gym memberships, and dietary supplements primarily intended for weight loss are not eligible, unless prescribed by a doctor as treatment for a specific medical condition like obesity. Other general health items not directly related to medical care, such as electric toothbrushes, water filters, or baby bottles, are also excluded. The rule of thumb is whether the item is primarily for medical treatment or prevention, rather than general health or cosmetic purposes.

Using Your HSA for OTC Purchases

Using your HSA for eligible over-the-counter purchases involves retaining documentation. Maintaining detailed receipts is essential for every HSA-funded transaction. These receipts should clearly indicate the item purchased, the date of purchase, and the amount paid, as they serve as substantiation for qualified medical expenses in the event of an Internal Revenue Service (IRS) audit.

One common method is using an HSA debit card, which is linked to your HSA. Many retailers utilize an Inventory Information Approval System (IIAS) at the point of sale, which automatically identifies eligible medical items and segregates them from ineligible ones. While these systems can streamline the process, it remains the account holder’s responsibility to keep all receipts, as HSA administrators do not track individual purchases for eligibility.

Alternatively, individuals can pay for eligible OTC items using personal funds, then seek reimbursement from their HSA. This process involves submitting a claim to the HSA administrator, which requires a completed reimbursement request form and copies of the detailed receipts. Reimbursement claims can be submitted online through the HSA provider’s portal or by mailing in the necessary paperwork. This flexibility allows individuals to pay out-of-pocket and reimburse themselves at a later date, even years after the expense was incurred, provided proper documentation is maintained.

Maintaining Records for HSA Transactions

Maintaining records for all HSA transactions is a responsibility for account holders, primarily for tax compliance and potential IRS audits. While you are not required to submit these records with your tax return, you must be able to provide them if audited. Failure to substantiate expenses with proper documentation can result in the disallowance of the expense, potentially incurring income tax and a 20% penalty on the unsupported amount.

The records to keep include detailed receipts for every purchase made with HSA funds, even those paid with an HSA debit card. These receipts should specify the date, amount, and description of the item or service. It is advisable to retain HSA administrator statements, which outline contributions, distributions, and account balances, along with any relevant explanation of benefits (EOB) statements from your health insurance provider.

Regarding retention, experts recommend keeping HSA documentation for at least three years from the date you file your tax return, aligning with the IRS audit window. However, some sources suggest retaining records for up to seven years to cover extended audit periods in certain situations. Organizing these records, whether through physical files, digital scans, or cloud storage solutions, ensures easy access and helps in demonstrating that all distributions were for qualified medical expenses.