Can You Use an HSA for Medical Marijuana?
Unpack the federal tax rules governing HSA eligibility for medical marijuana expenses.
A Health Savings Account (HSA) provides a tax-advantaged way for individuals to save and pay for qualified healthcare expenses. These accounts offer a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for eligible medical costs are also tax-free. As medical marijuana becomes legal in many states, a common question arises regarding whether these funds can be used to cover such expenses. The differing legal stances between state and federal governments create a complex situation for HSA eligibility.
Understanding HSA-Eligible Expenses
The Internal Revenue Service (IRS) defines qualified medical expenses for HSA purposes. These expenses generally include costs for diagnosing, curing, mitigating, treating, or preventing disease, primarily to alleviate or prevent a physical or mental defect or illness. Examples of common qualified expenses include doctor visits, prescription medications, vision care, and dental treatments.
Expenses that are merely beneficial to general health, such as vitamins not prescribed for a specific medical condition, do not qualify. The IRS states that medical care expenses do not include amounts paid for illegal operations or treatments. This rule applies to expenses for substances that remain illegal under federal law, regardless of state-level legality. Taxpayers must ensure expenses reimbursed from an HSA meet IRS criteria.
Federal Treatment of Medical Marijuana
Despite the growing number of states that have legalized medical marijuana, its status at the federal level remains unchanged. Under the federal Controlled Substances Act (CSA), marijuana is classified as a Schedule I controlled substance. This classification means the federal government considers it to have a high potential for abuse and no accepted medical use.
This federal prohibition directly impacts how medical marijuana is treated for tax purposes, including its eligibility for payment from tax-advantaged accounts like HSAs. The federal government’s stance takes precedence over state laws when it comes to federal tax matters. Therefore, even in states where medical marijuana is legal and prescribed by a physician, its federal classification creates a conflict for HSA usage.
Using Your HSA for Medical Marijuana
Given marijuana’s classification as a Schedule I controlled substance under federal law, expenses for medical marijuana are not considered qualified medical expenses by the IRS. This means that using funds from an HSA to purchase medical marijuana is not permitted. The IRS bases its definition of qualified medical expenses on federal law, which still considers marijuana illegal.
If an individual uses HSA funds for non-qualified expenses, the distributed amount becomes taxable income. Individuals under age 65 may also face an additional 20% penalty on the non-qualified distribution. This applies even if medical marijuana is legal in the individual’s state of residence and recommended by a doctor. HSA holders must adhere to federal guidelines to avoid potential tax liabilities and penalties.