How Can I Use HSA Funds for Qualified Medical Expenses?

A Health Savings Account (HSA) is a tax-advantaged savings account available to those enrolled in a high-deductible health plan. It offers a triple-tax benefit: contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Properly using these funds requires understanding which expenses are eligible, how to pay for them, and what documentation is necessary.

Qualified Medical Expenses

The Internal Revenue Service (IRS) provides guidance on what constitutes a qualified medical expense in Publication 502. These are defined as costs associated with the diagnosis, cure, mitigation, treatment, or prevention of disease. The expense must be primarily to alleviate or prevent a physical or mental defect or illness.

Medical Services

Payments for services from medical professionals are eligible expenses. This includes costs for visits to doctors, surgeons, and dentists, as well as hospital services like inpatient care and lab fees. Ambulance services, transportation for medical care, co-insurance, and deductibles paid under your health plan also qualify.

Dental and Vision Care

Routine dental and vision care are covered by HSA funds. This includes payments for dental cleanings, fillings, braces, and extractions. For vision, expenses for eye exams, eyeglasses, and contact lenses are eligible. Procedures like LASIK eye surgery or the cost of artificial teeth also qualify.

Prescriptions and Over-the-Counter Products

The cost of prescription medications is a qualified expense. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows HSA funds to be used for over-the-counter (OTC) medications without a prescription. This includes items like pain relievers, cold medicines, and allergy products. The CARES Act also made menstrual care products, such as tampons and pads, eligible expenses.

Medical Equipment and Supplies

Durable medical equipment and necessary supplies are eligible for HSA spending. This includes items like crutches, blood sugar test kits for diabetics, bandages, and breast pumps. Equipment designed to assist individuals with disabilities, such as a guide dog for a visually impaired person or specialized telephone equipment for the hearing impaired, also qualifies.

Therapies and Treatments

Therapeutic services can be paid for with HSA funds. This includes physical therapy, chiropractic care, and mental health counseling. Treatment for substance abuse and programs to stop smoking are also considered qualified medical expenses.

Ineligible HSA Expenses

Using HSA funds for non-qualified expenses results in the withdrawal being treated as taxable income and subject to a 20% penalty.

Expenses that are beneficial to general health but do not treat a specific medical condition are ineligible. This includes vitamins, nutritional supplements, and gym memberships, unless prescribed by a doctor for a specific illness. Items for general personal use, such as toothpaste and soap, cannot be purchased with HSA funds.

Cosmetic procedures directed at improving appearance, such as teeth whitening or elective plastic surgery, do not qualify. An exception exists if the surgery is necessary to improve a deformity from an injury, congenital abnormality, or disfiguring disease.

Insurance premiums for standard health plans are generally not eligible. Exceptions exist for COBRA continuation coverage, health coverage while receiving unemployment compensation, long-term care insurance, and Medicare premiums for those over age 65.

Accessing Your HSA Funds

The most direct method is using an HSA-affiliated debit card. This card is linked to your HSA balance and can be used at the point of sale, such as a doctor’s office or pharmacy, just like a regular debit card.

Another approach is to pay for the expense out-of-pocket and then reimburse yourself from the HSA. You can request a withdrawal from your HSA administrator, who may send a check or direct deposit to your bank account. There is no time limit for reimbursement, as long as the expense occurred after the HSA was established.

Some HSA administrators also offer an online bill-pay feature. This allows you to authorize a direct payment from your HSA to a medical provider, such as a hospital or clinic, which can be useful for managing larger medical bills.

Required Documentation for Withdrawals

HSA withdrawals do not require pre-approval, but you are responsible for maintaining records proving the funds were used for qualified medical expenses. The IRS can audit your tax return and may ask for this documentation. Failure to provide adequate proof can result in the distribution being deemed taxable and subject to penalties.

You should keep itemized receipts from providers and Explanation of Benefits (EOB) statements from your insurer, as a simple credit card receipt is not sufficient. The documentation must clearly show:

• The name of the provider or store
• The date the service was rendered or the product was purchased
• A description of the service or item
• The amount of the expense

It is recommended to keep these documents for at least three years from the date you file the tax return on which the distribution is reported. Some HSA administrators provide online tools to help you upload and organize receipts, which can simplify this record-keeping process.

Tax Reporting for HSA Distributions

Each year, your HSA administrator will report the total amount you withdrew from your account on IRS Form 1099-SA. You are then required to report these distributions on IRS Form 8889 and file it with your annual tax return. This form reconciles your distributions with qualified medical expenses.

If your total distributions are less than or equal to your total qualified medical expenses, the withdrawals are tax-free. Any portion of a distribution not used for qualified medical expenses must be included in your gross income and is subject to an additional 20% tax penalty.

The 20% penalty is waived if you are age 65 or older, become disabled, or if the distribution is made to a beneficiary after your death. However, in these situations, the amount of the non-qualified distribution is still considered taxable income; only the penalty is avoided.