Can You Use HSA for Funeral Expenses?
Navigate HSA rules for end-of-life costs. Understand what medical expenses are covered and the implications of non-qualified withdrawals.
A Health Savings Account (HSA) is a tax-advantaged savings account for healthcare expenses. It allows individuals to pay or reimburse certain medical costs. This financial tool is linked to enrollment in a high-deductible health plan (HDHP), which features lower monthly premiums and higher deductibles. Contributions to an HSA can be tax-deductible or excluded from gross income, and earnings grow tax-free.
Understanding Qualified Medical Expenses
Health Savings Accounts are governed by strict rules regarding how their funds can be used, primarily limited to “qualified medical expenses” as defined by the Internal Revenue Service (IRS). The IRS stipulates that these expenses include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease. This definition also extends to costs for treatments affecting any structure or function of the body.
Examples of qualified medical expenses include physician office visits, prescription medications, hospital stays, and dental procedures like cleanings, fillings, or braces. Vision care, such as eye exams, contact lenses, eyeglasses, and LASIK surgery, also qualifies. Expenses for chiropractic care, acupuncture, ambulance services, and mental health treatment are eligible.
Since the passage of the CARES Act, the list of qualified expenses has expanded to include over-the-counter medications and menstrual products, without requiring a prescription. Certain long-term care insurance premiums may also be eligible for payment using HSA funds, subject to specific limits.
Funeral Costs and HSA Eligibility
Funeral expenses are not considered qualified medical expenses by the IRS. Costs associated with final arrangements, such as burial plots, cremation services, embalming, wakes, caskets, and headstones, do not meet the IRS criteria for medical care. This also applies to professional fees charged by funeral homes for their services.
The primary reason for this exclusion is that these expenses are not incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease. They do not relate to affecting any structure or function of the body, which is the core definition of a qualified medical expense.
Tax Consequences of Non-Qualified Withdrawals
Using HSA funds for expenses that do not qualify as medical care carries tax consequences. Any withdrawals made for non-qualified purposes are subject to regular income tax. This means the amount withdrawn will be added to your taxable income for the year, potentially increasing your overall tax liability.
For HSA account holders under the age of 65, an additional 20% penalty tax is assessed on non-qualified distributions. For instance, a non-qualified withdrawal of $500 would incur a $100 penalty on top of the regular income tax. It is important to maintain accurate records of all HSA distributions and report them on IRS Form 8889, which must be filed with your federal income tax return.
Once an HSA holder reaches age 65, the 20% penalty for non-qualified withdrawals no longer applies. However, any distributions used for non-medical expenses after age 65 are still subject to ordinary income tax. This rule change provides more flexibility in using HSA funds in retirement.
Medical Expenses Leading Up to Death
While funeral expenses are not eligible, legitimate medical expenses incurred prior to an individual’s death can be paid for with HSA funds. These include hospital bills, doctor visits, prescription medications, nursing care, and hospice services received by the deceased. These are considered valid medical costs under IRS guidelines.
HSA funds can be used to reimburse these pre-death medical expenses, even if they were paid out-of-pocket by the individual or their family. In situations where a non-spouse beneficiary inherits an HSA, they can use the funds to pay for the deceased account holder’s qualified medical expenses incurred before death for up to one year after the date of death. This provision allows for tax-free reimbursement of medical bills that arose during the final stages of life.