Can I Use My HSA for Prescriptions?
Navigate using your HSA for prescription costs. Understand eligible expenses, payment methods, and crucial record-keeping for tax benefits.
A Health Savings Account (HSA) provides a tax-advantaged way to save for qualified medical expenses. Available to individuals enrolled in a high-deductible health plan (HDHP), HSAs allow funds for various healthcare costs, including prescription medications. Contributions can reduce taxable income, and withdrawals for eligible expenses are tax-free.
Understanding Eligible Prescription Expenses
HSAs cover a wide array of prescription medications, including brand-name and generic drugs. Any medicine prescribed by a healthcare provider is HSA-eligible, including those for chronic conditions or temporary ailments.
Regulations for over-the-counter (OTC) medications and HSAs changed on January 1, 2020, due to the CARES Act. OTC medications no longer require a prescription for HSA reimbursement. This expanded eligibility to common products like pain relievers, cold and flu remedies, allergy medications, and menstrual products. HSAs also cover other prescribed items and medical necessities, such as prescription eyeglasses, contact lenses, and medical equipment for diagnosis, treatment, or prevention.
Process for Using Your HSA Funds
Utilizing HSA funds for eligible prescription expenses offers several convenient methods. One common approach involves using an HSA-linked debit card, which functions similarly to a regular debit card at pharmacies. When presenting the card, funds are directly deducted from the HSA balance. Ensure the pharmacy has up-to-date insurance information to apply any relevant discounts before payment.
Alternatively, individuals can pay for prescriptions out-of-pocket and then seek reimbursement from their HSA. This method allows flexibility, as there is no time limit for requesting reimbursement for eligible expenses incurred after the HSA was established. To receive reimbursement, individuals usually log into their HSA provider’s online portal, enter the expense details, and select a reimbursement method, such as an electronic transfer to a linked bank account or a check. Some HSA custodians also offer bill pay services, enabling direct payments to healthcare providers or pharmacies from the HSA.
Key Considerations for HSA Use
Proper record-keeping is a crucial aspect of managing an HSA, especially for tax purposes and in the event of an IRS audit. Individuals should retain all receipts for qualified medical expenses, along with explanations of benefits (EOBs) from their insurer, to substantiate that distributions were used for eligible costs and not previously reimbursed or deducted. These records should be maintained for at least as long as tax returns are subject to audit, typically several years.
HSA withdrawals for qualified medical expenses are tax-free. However, using HSA funds for non-eligible expenses carries significant tax implications. If an individual under age 65 makes a non-qualified withdrawal, the amount is subject to ordinary income tax and an additional 20% penalty. While the 20% penalty is waived for those aged 65 or older, the withdrawal still remains subject to income tax if not used for a qualified medical expense. Account holders receive Form 1099-SA from their HSA trustee, which reports distributions, and they must file Form 8889 with their tax return to report HSA activity.