Can You Use an HSA for Cosmetic Surgery?

Health Savings Accounts (HSAs) serve as a tax-advantaged savings vehicle specifically designed for healthcare expenses. They offer tax benefits, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. A common question is whether HSA funds can be used for cosmetic surgery, which depends on what the Internal Revenue Service (IRS) considers a qualified medical expense.

Defining HSA Qualified Medical Expenses for Cosmetic Procedures

The IRS defines a “qualified medical expense” for HSA purposes as costs incurred primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. Expenses must be for medical care, not merely for activities beneficial to general health. To be qualified, an expense must address a legitimate medical condition.

Cosmetic surgery generally does not meet this primary medical necessity criterion. Procedures undertaken solely to improve appearance, without addressing a specific medical condition or bodily dysfunction, are typically considered non-qualified expenses. For example, elective aesthetic procedures like a facelift or liposuction performed purely for cosmetic reasons are not eligible for HSA funds.

However, specific exceptions allow cosmetic surgery to be a qualified medical expense. Such procedures become eligible if necessary to ameliorate a deformity arising from a congenital abnormality, a personal injury, or a disfiguring disease. This means that if the surgery corrects a condition present from birth, repairs damage from an accident, or addresses disfigurement caused by an illness, it may qualify.

Examples of eligible cosmetic procedures include reconstructive surgery following a traumatic injury, surgery to correct a severe birth defect, or breast reconstruction after a mastectomy due to cancer. These procedures are considered medically necessary because they restore bodily function or correct significant disfigurement that impacts health or quality of life. The underlying principle is medical necessity, requiring a clear diagnosis or medical condition that the procedure aims to treat or alleviate.

A procedure like a rhinoplasty, commonly known as a nose job, illustrates this distinction. If performed to correct breathing difficulties caused by a broken nose, it is a qualified medical expense. Conversely, if the surgery is done simply to change the nose’s appearance, it would not be eligible for HSA funds. Similarly, some dermatological treatments like those for skin cancer or severe acne might qualify, while procedures for wrinkles or dark spots that are purely aesthetic generally do not.

Managing HSA Funds for Eligible Costs

Once an expense has been determined to be a qualified medical expense, individuals have several methods for using their HSA funds. Account holders can use a debit card provided by their HSA administrator to pay directly at the point of service. Alternatively, they can pay for the expense out-of-pocket and then reimburse themselves from their HSA at a later date, even years after the expense was incurred, as long as the HSA was established before the expense. Funds can also be used to pay providers directly through online requests or checks.

Meticulous record-keeping is important for all HSA expenditures, particularly for expenses subject to IRS scrutiny, such as cosmetic procedures falling under an exception. Account holders are responsible for substantiating that distributions were for qualified medical expenses. Essential records include itemized receipts detailing the service date, expense description, and amount paid.

Also keep Explanation of Benefits (EOB) statements from health insurance providers and, for dual-purpose items or exceptions, a Letter of Medical Necessity from a healthcare provider. These documents provide evidence of medical necessity for an IRS audit. Without proper documentation, any distribution not proven to be for a qualified medical expense can lead to tax implications.

If HSA funds are used for non-qualified expenses, the distributed amount is subject to ordinary income tax. An additional 20% penalty tax applies to non-qualified withdrawals. This penalty is waived only if the account holder is age 65 or older or disabled. The IRS considers such withdrawals taxable income, increasing tax liability.