Can I Use My HSA for Regular Purchases?

A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed for healthcare expenses. It is available to individuals enrolled in a High Deductible Health Plan (HDHP). Beyond this, an HSA also functions as an investment vehicle, allowing funds to grow tax-free over time.

Qualifying Medical Expenses

An HSA can only be used for specific “qualifying medical expenses” as defined by the Internal Revenue Service (IRS). Using HSA funds for any other purpose carries financial consequences. These eligible expenses encompass a broad range of healthcare services and products.

Common qualifying medical expenses include doctor’s office visits, prescription medications, dental care, and vision care. Mental health services and chiropractic care are also covered. Certain over-the-counter medications and medical supplies, such as bandages, crutches, and diagnostic devices, can also be paid for using HSA funds. Individuals can refer to IRS Publication 502 for a comprehensive list of eligible medical expenses. Cosmetic procedures or general health items, such as gym memberships, are not considered eligible unless prescribed by a medical professional for a specific condition.

Understanding Non-Qualified Withdrawals

Using HSA funds for expenses that do not qualify as medical expenses, often termed “regular purchases,” has financial repercussions. Such withdrawals are subject to income tax. An additional 20% penalty is applied to these non-qualified withdrawals if the account holder is under age 65, is not disabled, or is not yet covered by Medicare.

For example, using HSA funds for groceries, entertainment, or non-medical travel would be considered a non-qualified withdrawal. After an account holder reaches age 65, becomes disabled, or enrolls in Medicare, the 20% penalty is waived. However, any withdrawals made for non-qualified expenses after this point are still subject to ordinary income tax.

Proper Use and Record Keeping

Managing an HSA effectively involves understanding proper usage and maintaining diligent records. Account holders can use their HSA in various ways, such as using an HSA-linked debit card for direct payments at medical merchants. Alternatively, individuals can pay for qualified medical expenses out-of-pocket and then reimburse themselves from their HSA, even at a later date. This reimbursement can be done by submitting receipts to the HSA provider or transferring funds online to a linked bank account.

Maintaining meticulous records for all HSA-funded expenses is important for compliance. The IRS requires records proving distributions were for qualified medical expenses, not reimbursed, and not claimed as deductions. These records should include receipts, explanations of benefits (EOBs) from insurance providers, and any relevant doctor’s notes. Such documentation is necessary for IRS audits. Records should be stored securely, either digitally or physically, for tax purposes, generally for at least three years.