Can I Use My HSA for Non-Medical Expenses?

You can use funds from a Health Savings Account (HSA) for non-medical expenses, but doing so has financial consequences. An HSA is a tax-advantaged account designed to help individuals with high-deductible health plans save for future healthcare costs. The account offers a triple tax advantage: contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Taking distributions for other reasons negates these advantages and results in taxes and penalties.

Defining Qualified Medical Expenses

The Internal Revenue Service (IRS) determines what counts as a “qualified medical expense” (QME), providing detailed guidance in Publication 502. These are costs associated with the diagnosis, cure, mitigation, treatment, or prevention of disease. Expenses must be primarily to alleviate or prevent a physical or mental illness. Common examples of QMEs include payments for doctor visits, prescription medications, dental treatments like fillings or braces, and vision care such as exams and eyeglasses.

The definition also covers a wide range of other costs, such as ambulance services, hearing aids, and prescribed physical therapy. Conversely, the IRS explicitly excludes certain expenses from being considered qualified. These non-qualified expenses often include things that are merely beneficial to general health, such as vitamins or a gym membership, teeth whitening, and non-prescription nutritional supplements.

Tax Consequences of Non-Medical Withdrawals

The financial impact of using HSA funds for non-medical purposes depends on your age. For account holders under the age of 65, withdrawals for non-qualified expenses are included in your gross income and taxed at your regular income tax rate. These distributions are also subject to an additional 20% tax. For instance, if you are in the 22% federal income tax bracket and withdraw $1,000 for a non-medical reason, you would owe $220 in income tax plus a $200 penalty.

Upon reaching age 65, the rules for non-medical withdrawals become more favorable. The 20% additional tax penalty is waived for distributions made after you turn 65, become disabled, or upon your death. Any amount you withdraw for non-medical reasons is still considered taxable income. In this scenario, the HSA functions similarly to a traditional retirement account, like a 401(k) or IRA, where distributions are taxed as ordinary income.

Reporting Withdrawals on Your Tax Return

Your HSA custodian will provide you with Form 1099-SA, which reports the gross distribution amount from your account for the year. You must use the information from this form to complete and file Form 8889 with your Form 1040 tax return.

On Form 8889, you will report the total distributions you received as shown on Form 1099-SA. A subsequent line on the form requires you to enter the portion of that distribution that was used for qualified medical expenses. The form then guides you to calculate the taxable amount by subtracting your qualified expenses from the total distribution. If you are under 65 and have a taxable amount, the form will direct you to calculate the 20% additional tax, which is then carried over to your main tax return.