Can You Use HSA to Pay Medical Bills?
Unlock the power of your Health Savings Account. Learn how to effectively use your HSA for medical expenses and avoid common pitfalls.
Health Savings Accounts (HSAs) offer a tax-advantaged way for individuals to save and pay for healthcare costs. Designed to work with high-deductible health plans, HSAs help manage out-of-pocket medical expenses. Contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free, offering a triple tax advantage. This structure allows individuals to build a dedicated fund for health-related expenditures.
Understanding Qualified Medical Expenses
The Internal Revenue Service (IRS) defines “qualified medical expenses” for HSA purposes. These generally encompass costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. This broad definition covers a wide range of healthcare services and products. Common examples include doctor visits, prescription medications, dental care (such as X-rays, fillings, and braces), and vision care (including eyeglasses, contact lenses, and eye exams).
Beyond routine care, HSAs can cover other specific medical needs like mental health services, chiropractic treatments, and certain fertility enhancements. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 expanded qualified expenses to include over-the-counter (OTC) medications without requiring a prescription. This legislative change also added menstrual care products to the list of eligible items.
Some items are generally not considered qualified medical expenses. These include cosmetic procedures (unless medically necessary to correct a deformity), general health items like gym memberships (unless prescribed to treat a specific disease), and most insurance premiums. However, exceptions for insurance premiums include COBRA, long-term care insurance, and Medicare Parts B and D for individuals aged 65 and older. Account holders should maintain detailed records and receipts for all medical expenses paid with HSA funds to substantiate their qualified nature if ever requested by the IRS.
Methods for Using Your HSA Funds
Using HSA funds for qualified medical expenses offers flexibility, allowing account holders to manage their healthcare finances effectively. One common method is direct payment using an HSA-linked debit card. Many HSA providers issue these cards, which function like regular debit cards at healthcare providers, pharmacies, or for online purchases of eligible items. This allows for immediate payment at the point of service.
Another practical approach involves paying for qualified medical expenses out-of-pocket and then reimbursing oneself from the HSA. This strategy can be beneficial for allowing HSA funds to grow tax-free over a longer period, especially if the account holder can comfortably cover current expenses from other sources. Individuals can transfer money from their HSA to a personal bank account electronically or write themselves a check. Reimbursements can occur anytime, even years later, as long as the expense was incurred after the HSA was established.
Many HSA providers also offer online bill pay features, enabling account holders to directly pay medical bills through their online portal. This can be a convenient way to manage payments for larger medical invoices.
Consequences of Non-Qualified Withdrawals
Using HSA funds for expenses that do not meet the IRS definition of qualified medical expenses can lead to financial penalties. Any amount withdrawn for non-qualified purposes is considered taxable income and must be included in the account holder’s gross income for the year. This means the funds are subject to ordinary income tax rates.
In addition to income tax, a 20% penalty applies if the non-qualified withdrawal occurs before the account holder reaches age 65. For example, a $1,000 non-qualified withdrawal for someone under 65 could result in $200 in penalties, plus the income tax due on the entire $1,000.
The 20% penalty does not apply if the withdrawal occurs after the account holder turns 65, in the event of disability, or upon death. However, these withdrawn funds are still subject to ordinary income tax if not used for qualified medical expenses.