Can I Reimburse Myself From HSA for Prior Year Expenses?

A Health Savings Account (HSA) functions as a tax-advantaged savings and investment account designed to help individuals cover qualified medical expenses. This type of account is available to those enrolled in a high-deductible health plan (HDHP). Contributions made to an HSA can be tax-deductible, grow tax-free, and distributions for qualified medical expenses are also tax-free, a beneficial financial tool for healthcare planning.

Rules for Reimbursement

You can reimburse yourself from an HSA for medical expenses incurred in prior years, provided certain conditions are met. The medical expense must have been incurred after the HSA was established. This means that even if you pay for an expense out-of-pocket today, you can seek reimbursement from your HSA for it years later, as long as your HSA was already open when the expense first occurred.

The expenses must qualify as “qualified medical expenses” according to Internal Revenue Service (IRS) guidelines. These are the same expenses that would be eligible for a medical expense deduction on a tax return. Examples include most forms of medical, dental, and vision care, prescription drugs, certain over-the-counter medications, and menstrual care products. However, regular health insurance premiums are not considered qualified medical expenses, with exceptions for items like COBRA continuation coverage, qualified long-term care insurance premiums within limits, and Medicare premiums.

The “no double-dipping” rule applies to HSA reimbursement. The medical expense cannot have been reimbursed by another source, such as a health insurance plan or a Flexible Spending Account (FSA). Additionally, the expense cannot have been taken as an itemized deduction on a tax return in any prior year. This ensures the tax-free status of the reimbursement.

There is no specific time limit for when the reimbursement from an HSA must occur after the expense is incurred. This flexibility allows account holders to pay for current medical costs out-of-pocket and allow their HSA funds to grow tax-free over time through investments. Reimbursement can occur at a later date, perhaps even in retirement, maximizing tax benefits and turning the HSA into a long-term savings vehicle.

Essential Documentation

Meticulous record-keeping is important when planning to reimburse yourself from an HSA, particularly for expenses from prior years. You must retain specific types of documentation for each medical expense you intend to reimburse. These include original receipts, invoices from healthcare providers, and Explanation of Benefits (EOBs) statements from your insurance company.

These documents should clearly show the date the service was rendered, a detailed description of the service or product received, the amount paid, and the name of the patient. Without these specifics, it can be challenging to prove the legitimacy of the expense. These records are important to demonstrate that the distributions from your HSA were exclusively for qualified medical expenses, that they were not reimbursed by another source, and that they were not previously claimed as a tax deduction.

Retain these records for an extended period, at least for as long as your tax return for the year the reimbursement is taken remains open to audit by the IRS. While the general statute of limitations for IRS audits is three years, it can extend to six years or longer in specific situations. Maintaining organized digital copies, such as scanned receipts, or a physical filing system, can simplify the process if documentation is requested.

The Reimbursement Process

Initiating a reimbursement from your Health Savings Account involves a straightforward process with your HSA custodian. Most custodians offer multiple methods to request funds, such as through an online portal, a dedicated mobile application, or by submitting a specific request form. Some may also facilitate requests via phone.

Once the request is processed, funds can be disbursed through common methods like direct deposit into a linked bank account or by mailing a physical check. The specific options available depend on your HSA provider. This withdrawal process is similar to other HSA distributions, but it is specifically for the purpose of reimbursing a previously incurred qualified medical expense.

The HSA custodian does not verify the qualified nature of your expense during the reimbursement process. The responsibility for ensuring the expense meets IRS criteria and for maintaining adequate documentation rests solely with the account holder. This procedural step simply facilitates the movement of funds from your HSA to your personal account.

Tax Implications of Reimbursement

Distributions from an HSA that are used to pay or reimburse qualified medical expenses, even those from prior years, are considered tax-free. This tax-free status is a significant advantage of HSAs, allowing individuals to access their healthcare savings without incurring income tax on the withdrawal. The tax benefits extend to the growth of the funds within the account, which also occurs on a tax-free basis.

However, if an HSA distribution is not used for a qualified medical expense, or if the distribution violates other rules (e.g., the expense being incurred before the HSA was established or having been previously reimbursed), it becomes taxable income. If the account holder is under the age of 65, the non-qualified distribution may also be subject to an additional 20% penalty tax.

HSA custodians report all distributions to the IRS on Form 1099-SA. While this form shows the total amount distributed, it does not indicate whether the distributions were for qualified medical expenses. It is the taxpayer’s responsibility to prove that distributions were for qualified medical expenses when filing their tax return, typically using IRS Form 8889. This highlights the importance of maintaining thorough records to substantiate all reimbursements.