Can You Use HSA for Elective Surgery?

A Health Savings Account (HSA) offers a tax-advantaged way to save and pay for qualified medical expenses. This type of account is available to individuals enrolled in a high-deductible health plan (HDHP) and serves as a long-term savings vehicle for healthcare costs. HSAs provide a unique opportunity to manage healthcare finances with certain tax benefits, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible expenses. Using HSA funds for elective surgeries requires understanding specific IRS guidelines.

Understanding Qualified Medical Expenses

The Internal Revenue Service (IRS) defines what constitutes a “qualified medical expense” for HSA purposes, primarily outlined in IRS Publication 502. Generally, these are costs paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any structure or function of the body. This broad definition includes a wide range of services and products, from doctor’s fees and prescription medications to dental and vision care.

When considering elective surgery, its eligibility for HSA funds depends on whether it meets this medical necessity criterion. If an elective surgery is performed to treat a medical condition, alleviate pain, restore function, or prevent disease, it is considered a qualified medical expense. For example, cataract surgery, joint replacements for arthritis, or breast reconstruction after a mastectomy are eligible. Rhinoplasty (nose reshaping) is qualified if it addresses a breathing difficulty or a deformity from an injury, not solely for cosmetic improvement.

Purely cosmetic procedures, those primarily aimed at improving appearance without promoting proper body function or treating an illness, are not qualified medical expenses. However, an exception exists if the cosmetic procedure is necessary to improve a deformity arising from a congenital abnormality, a personal injury, or a disfiguring disease. Using HSA funds for non-qualified cosmetic procedures can lead to tax penalties.

Using Your HSA for Medical Costs

Accessing and utilizing HSA funds for medical expenses, including qualified elective surgeries, involves straightforward procedural steps. Account holders can pay for services directly using an HSA debit card provided by their plan administrator. Another method involves paying out-of-pocket and then reimbursing oneself from the HSA. Reimbursement can occur at any time, even years after the expense was incurred, provided it was qualified and incurred after the HSA was established.

Maintaining records is essential when using your HSA. Account holders must substantiate that all withdrawals were for qualified medical expenses. This includes receipts, statements from healthcare providers, and Explanation of Benefits (EOB) forms. These documents serve as proof in case of an IRS audit, demonstrating tax-free eligibility.

Consequences of Non-Qualified Withdrawals

Using HSA funds for expenses that do not meet the IRS definition of qualified medical expenses carries financial and tax implications. Such withdrawals are subject to income tax; the distributed amount will be added to your taxable income. Beyond income tax, an additional 20% penalty tax is applied to non-qualified withdrawals if the account holder is under age 65. For example, a $500 non-qualified withdrawal incurs a $100 penalty in addition to being taxed as ordinary income.

The HSA administrator will report distributions on IRS Form 1099-SA, sent to the account holder and the IRS. Account holders report HSA activity, including distributions, on IRS Form 8889 when filing their federal income tax return. This form determines if any portion of distributions is taxable or subject to penalty. Understanding these rules and tracking qualified expenses avoids unexpected tax liabilities and penalties.