Can You Spend Your HSA Funds on Anything?

Health Savings Accounts (HSAs) offer a financial tool for managing healthcare costs. HSAs are tax-advantaged savings vehicles for medical expenses. HSAs are typically paired with High-Deductible Health Plans (HDHPs), allowing individuals to save and pay for qualified medical expenses with significant tax benefits.

Contributions made to an HSA are tax-deductible, meaning they can reduce your taxable income for the year. The funds within the account grow tax-free, similar to a retirement account. Withdrawals used for qualified medical expenses are also entirely tax-free, providing a triple tax advantage.

Understanding Qualified Medical Expenses

The Internal Revenue Service (IRS) defines qualified medical expenses as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. For comprehensive guidance, individuals can refer to IRS Publication 502, “Medical and Dental Expenses.”

Common qualified medical expenses include doctor visits, such as co-pays, deductibles, and co-insurance amounts. Prescription medications, dental care (including exams, cleanings, fillings, and orthodontics), and vision care (like eye exams, glasses, contact lenses, and laser eye surgery) are also eligible. Other covered services extend to chiropractic care, mental health services (therapy and counseling), and acupuncture.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, expanded the scope of qualified medical expenses. This legislation permanently eliminated the requirement for a prescription for over-the-counter (OTC) medications, making them directly eligible for HSA reimbursement. Similarly, feminine hygiene products, such as tampons, pads, liners, cups, and sponges, were also added to the list of eligible expenses.

HSAs can also cover certain insurance premiums under specific conditions. These include premiums for long-term care insurance, though specific annual limits apply based on age. Premiums for COBRA continuation coverage and healthcare coverage received while collecting unemployment compensation are also qualified. For individuals aged 65 and older, Medicare Part B and D premiums, and in some cases, Part A premiums, are eligible.

An expense must be primarily for medical care, rather than for general health improvement or cosmetic purposes. For instance, while a weight-loss program may be eligible if it treats a specific disease diagnosed by a physician, general health items like vitamins or gym memberships are not.

Ineligible Expenses and Penalties

While HSAs offer broad coverage for medical needs, certain expenses do not qualify for tax-free withdrawals. Cosmetic procedures, unless medically necessary to correct a deformity from an injury or disease, are generally ineligible. Items intended for general health or cosmetic purposes, such as most vitamins, dietary supplements, or general toiletries, are also excluded unless prescribed for a specific medical condition.

Other common examples of non-qualified expenses include gym memberships, health club dues, and expenses reimbursed by other insurance plans or sources. Funeral expenses and costs associated with general household help are also not permissible. Spending HSA funds on these ineligible items carries significant tax consequences.

If HSA funds are used for non-qualified expenses, the withdrawn amount becomes taxable income. Additionally, if the account holder is under 65 years old, an extra 20% penalty tax applies to the non-qualified withdrawal.

For example, a $500 non-qualified withdrawal by someone under 65 would result in the $500 being added to their taxable income, plus a $100 penalty. Once the account holder reaches age 65, non-qualified withdrawals are still taxed as ordinary income, but the 20% penalty is waived.

Accessing and Documenting HSA Use

Accessing HSA funds is straightforward, with several convenient methods available. Many HSA custodians provide a dedicated debit card, similar to a regular bank card, which can be used directly at the point of sale for qualified medical expenses. Account holders can also pay medical providers directly from their HSA using online bill pay features or checks provided by the custodian.

A common and flexible approach involves paying for medical expenses out-of-pocket and then reimbursing oneself from the HSA. This strategy allows the funds in the HSA to continue growing tax-free over time, potentially for many years, before being withdrawn. The reimbursement can occur years after the expense was incurred, provided the expense was incurred after the HSA was established.

Maintaining meticulous records for all HSA expenditures is important for compliance. Key documentation to retain includes receipts for all medical expenses, Explanation of Benefits (EOBs) from your health insurance provider, and invoices from healthcare providers. If an over-the-counter item or other specific product requires a prescription to be qualified, a copy of that prescription should also be kept.

Record-keeping serves a dual purpose: it helps demonstrate that withdrawals were used for qualified medical expenses and is necessary in the event of an IRS audit. The IRS requires account holders to maintain sufficient records to prove that distributions were exclusively for qualified medical expenses, had not been reimbursed from another source, and were not taken as an itemized deduction. These records should be kept with other tax documents.