Can You Use HSA for Over the Counter Medicine?
Navigate the rules and practicalities of using your Health Savings Account for over-the-counter medical expenses.
A Health Savings Account (HSA) offers a tax-advantaged way to manage healthcare costs. This account allows individuals to set aside pre-tax money for qualified medical expenses. Funds grow tax-free, and withdrawals for eligible expenses are also free from federal income tax, providing a triple tax advantage. To be eligible for an HSA, an individual must be covered by a high-deductible health plan (HDHP).
Eligible Over-the-Counter Items
Health Savings Accounts can be used for a wide array of over-the-counter (OTC) medicines and products, provided they are for medical care rather than general health or cosmetic purposes. Eligible items include common pain relievers such as acetaminophen and ibuprofen, cold and flu medications, allergy relief products, antacids, eye drops, nasal sprays, and various acne treatments.
Eligibility extends beyond medicines to products that treat medical conditions, such as bandages, first aid supplies, and diagnostic tests. Menstrual care products like tampons, pads, liners, and cups are also qualified medical expenses. However, vitamins and other dietary supplements typically remain ineligible unless a healthcare professional has prescribed them to treat a specific diagnosed medical condition.
The Prescription Requirement Rule
Historically, OTC medicines required a prescription from a doctor for HSA reimbursement. The Affordable Care Act (ACA) imposed this requirement in 2010, meaning many common OTC purchases could not be paid for with pre-tax HSA funds. Consumers often paid out-of-pocket for these items.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, 2020, brought a significant change. This legislation permanently eliminated the prescription requirement for most OTC drugs. The change was retroactive to January 1, 2020, allowing HSA funds for these expenses. The CARES Act also added menstrual products to the list of eligible expenses.
Purchasing and Reimbursement Methods
Using your HSA for eligible OTC items offers flexibility. One method is using an HSA debit card directly at the point of sale, like a regular debit card. These cards are accepted at pharmacies and many retailers, allowing immediate payment from your account.
Alternatively, pay for eligible OTC items out-of-pocket and seek reimbursement from your HSA administrator. This process involves submitting a claim through the HSA provider’s online portal or mobile application. There is no time limit for reimbursement, as long as the expense was incurred after your HSA was established. This flexibility allows funds to remain invested and grow tax-free until reimbursement is desired.
Record Keeping for Tax Purposes
Maintaining meticulous records for all HSA transactions, especially OTC purchases, is crucial for tax compliance. Although HSA administrators may not require receipts for every debit card transaction or reimbursement, the Internal Revenue Service (IRS) holds the account holder responsible for substantiating all withdrawals. This means retaining itemized receipts showing the date of purchase, amount paid, and a detailed description of the eligible item.
These records are important for an IRS audit, where you must prove all HSA distributions were for qualified medical expenses. Failure to provide adequate documentation for non-qualified withdrawals can result in income tax, plus a 20% penalty if the account holder is under age 65. The IRS recommends keeping tax records for at least three years from your tax return filing date, though some advisors suggest longer periods.