Can You Use HSA Funds for Donor Sperm Expenses?

Health Savings Accounts (HSAs) offer tax advantages for medical expenses, but not all healthcare costs qualify. For those considering fertility treatments, it’s important to determine whether expenses like donor sperm can be covered.

Understanding HSA rules helps prevent unexpected tax penalties and ensures compliance with IRS regulations.

IRS Guidelines for Qualified Medical Expenses

The IRS defines qualified medical expenses as costs for diagnosing, treating, or preventing disease, along with treatments affecting any body function. These expenses must be primarily for medical care and cannot be reimbursed by insurance or other sources. Section 213(d) of the Internal Revenue Code provides the framework for determining HSA-eligible expenses.

Eligible expenses include doctor visits, hospital care, prescription medications, and certain fertility treatments. Some reproductive health costs, such as in vitro fertilization (IVF) and fertility preservation, may qualify. However, the IRS does not provide an exhaustive list, so taxpayers must assess whether an expense meets the criteria for medical care.

Certain fertility treatments, including egg retrieval and embryo storage, may be eligible if linked to a diagnosed medical condition affecting fertility. The IRS requires that medical expenses be directly related to a taxpayer’s own medical care, which influences whether third-party reproductive services qualify.

HSA Coverage for Donor Sperm

HSA eligibility for donor sperm depends on whether it qualifies as medical care under IRS rules. If a doctor diagnoses infertility and prescribes donor sperm as part of a treatment plan, the expense is more likely to qualify.

However, if donor sperm is used without an infertility diagnosis—such as for conception by a single individual or a same-sex couple—the IRS may not consider it a medical necessity, making it ineligible for HSA reimbursement.

If donor sperm is part of a broader fertility treatment, such as intrauterine insemination (IUI) or IVF, and a physician confirms its necessity, it is more likely to qualify. Purchasing donor sperm without a direct medical diagnosis or treatment plan may not meet HSA eligibility requirements.

Documentation Requirements

Proper documentation is essential when using HSA funds for fertility treatments. The IRS requires detailed records proving an expense qualifies as medical care. This includes itemized receipts from healthcare providers or fertility clinics specifying the service, date, and amount paid. A credit card statement alone is insufficient; the receipt must indicate the expense was for an eligible medical treatment.

A letter of medical necessity from a licensed physician can strengthen the case for HSA eligibility. This document should outline the medical condition being treated, the recommended course of action, and the role of donor sperm in the treatment plan. If the IRS audits an HSA withdrawal, this letter serves as supporting evidence.

Taxpayers should retain copies of prescriptions or treatment plans from their doctor. If donor sperm is used with a medical procedure like IUI or IVF, documentation linking the sperm purchase to the procedure further supports its eligibility. Fertility clinics often provide detailed invoices breaking down costs, which can help demonstrate compliance with IRS guidelines.

Nonqualified Use Consequences

Using HSA funds for nonqualified expenses results in financial penalties. If funds are spent on an ineligible expense, the withdrawal becomes taxable income and must be reported on the account holder’s federal tax return.

Additionally, a 20% penalty applies unless the account holder is over 65, disabled, or deceased. For example, an improper $5,000 withdrawal would incur a $1,000 penalty, excluding regular income taxes.

The IRS can audit HSA transactions, and improper withdrawals increase the risk of scrutiny. If an audit finds misuse, additional penalties or interest may apply, especially if the issue spans multiple tax years.

Tax Reporting Considerations

All HSA distributions must be reported on Form 8889, filed with the account holder’s federal tax return. This form distinguishes qualified from nonqualified withdrawals to ensure only eligible expenses remain tax-free. If donor sperm expenses are claimed, supporting documentation should be readily available in case of an IRS inquiry.

If a distribution is later deemed nonqualified, the taxpayer must amend their tax return to reflect the taxable amount and any penalties owed. The IRS may also impose interest on unpaid tax liabilities if the improper withdrawal is discovered after the filing deadline. Maintaining thorough records, including receipts and medical necessity documentation, helps avoid tax complications and reduces audit risks.