Can You Use an HSA Card at an ATM?

A Health Savings Account (HSA) functions as a tax-advantaged savings vehicle designed specifically for healthcare expenses. It allows individuals enrolled in a high-deductible health plan to save money on a pre-tax basis, grow it tax-free, and withdraw it tax-free for qualified medical costs.

Accessing HSA Funds via ATM

Many HSA cards operate similarly to standard debit cards and can be used to withdraw cash at automated teller machines (ATMs). These cards typically bear the logos of major payment networks, such as Visa or Mastercard, allowing them to be used at any ATM that accepts those networks. To complete an ATM transaction, a Personal Identification Number (PIN) is usually required, and when prompted for the account type, selecting “checking” is often necessary to access the funds.

Be aware of potential limitations and fees when using an HSA card at an ATM. Daily withdrawal limits are commonly imposed by the HSA provider or the ATM owner, which can vary widely, often ranging from a few hundred dollars up to several thousand. Additionally, transaction fees may be incurred from both the ATM operator and your HSA custodian, typically ranging from $2 to $5 per transaction.

HSA-Eligible Expenses and Substantiation

HSA funds must be used exclusively for qualified medical expenses to maintain their tax-free status. The Internal Revenue Service (IRS) provides detailed guidance on what constitutes an eligible medical expense, primarily outlined in IRS Publication 502. This publication defines such expenses as costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body.

Common examples of qualified medical expenses include payments for doctor visits, prescription medications, dental care, vision care, and certain qualified long-term care insurance premiums. Conversely, expenses for general health purposes, like vitamins for overall well-being, are typically not eligible unless prescribed to treat a specific medical condition.

Maintaining records for all HSA expenditures is important, especially when cash is withdrawn from an ATM. Detailed documentation, such as receipts, invoices, and explanations of benefits, serves as proof that the funds were used for qualified medical expenses. These records are essential for substantiating expenditures in the event of an IRS audit, demonstrating compliance with tax regulations.

Tax Considerations for HSA Withdrawals

HSA withdrawals are entirely tax-free only when the funds are used for qualified medical expenses. If HSA funds are used for non-qualified expenses, the withdrawn amount becomes taxable as ordinary income. This means the distribution is added to your taxable income for the year, similar to wages or other earned income.

Furthermore, if the account holder is under the age of 65 at the time of a non-qualified withdrawal, an additional 20% penalty tax generally applies to the taxable amount. This penalty is a significant deterrent against using HSA funds for non-medical purposes prior to reaching retirement age. Certain exceptions to this penalty exist, such as withdrawals made due to disability.

HSA custodians are required to report all distributions to the IRS on Form 1099-SA. Account holders, in turn, are responsible for reporting their HSA distributions and demonstrating qualified medical expenses on IRS Form 8889 when filing their federal income tax return. This reporting process ensures the IRS can verify that funds were used appropriately and that any non-qualified withdrawals are correctly taxed and penalized.