How Can I Use My HSA Money on Qualified Expenses?

A Health Savings Account (HSA) provides a tax-advantaged way to save and pay for eligible healthcare costs. This account is specifically designed to work in conjunction with a High Deductible Health Plan (HDHP), which typically features lower monthly premiums in exchange for higher out-of-pocket expenses before insurance coverage begins. Funds contributed to an HSA are often tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses, offering a triple tax advantage. The money in an HSA rolls over year after year and remains with the account holder even if they change employers or health plans. This structure allows individuals to build a dedicated savings fund for both immediate and future medical needs.

Qualified Medical Expenses

The Internal Revenue Service (IRS) defines what constitutes a “qualified medical expense” for HSA purposes. These expenses must primarily be for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any part or function of the body. Funds can be used for the account holder, their spouse, or qualified dependents. Comprehensive guidance on eligible expenses is available in IRS Publication 502.

A wide range of general medical care costs are considered qualified. This includes payments for doctor visits, specialist consultations, hospital services, and diagnostic tests such as X-rays and MRIs. Prescription medications and insulin are also eligible expenses.

Dental care expenses are qualified, encompassing routine cleanings, fillings, orthodontia, and dentures. Similarly, vision care is covered, including eye exams, prescription eyeglasses, contact lenses, and corrective eye surgery like LASIK.

Mental health services, such as therapy, counseling, and psychiatric care, are also considered qualified medical expenses. Over-the-counter (OTC) medications and products, like pain relievers, allergy medications, and menstrual care products, became eligible without a prescription.

Medical equipment and supplies are eligible if medically necessary. Examples include crutches, wheelchairs, bandages, and blood sugar testing kits. Certain alternative treatments, such as acupuncture and chiropractic care, are also qualified when they address a specific medical condition.

Long-term care insurance premiums can be paid from an HSA, though there are specific annual limits based on age. Transportation costs incurred primarily for and essential to receiving medical care, such as mileage, parking fees, and tolls, are also eligible. Lodging expenses for the patient and a companion are reimbursable up to a certain limit if the travel is for medical care and away from home.

Health insurance deductibles, copayments, and coinsurance amounts are qualified expenses that can be paid from an HSA. However, regular health insurance premiums for a High Deductible Health Plan are not qualified, with exceptions for COBRA continuation coverage, healthcare coverage while receiving unemployment benefits, and Medicare premiums (Parts A, B, and D) for individuals aged 65 and older.

Non-Qualified Expenses and Tax Implications

Using HSA funds for expenses that are not considered qualified medical expenses carries financial consequences. These non-qualified expenses include items beneficial to general health or cosmetic in nature, rather than for treatment. Examples include general vitamins or nutritional supplements not prescribed for a medical condition, cosmetic procedures not medically necessary, and gym memberships unless specifically prescribed by a physician for a diagnosed illness.

If funds are withdrawn from an HSA for non-qualified expenses before the account holder reaches age 65, these withdrawals are subject to income tax. In addition, an extra 20% penalty is applied to the withdrawn amount. The entire amount of the non-qualified distribution is added to the individual’s gross income for tax purposes.

Once an HSA account holder reaches age 65, the rules for non-qualified withdrawals become more flexible. After age 65, withdrawals for non-qualified expenses are still subject to income tax. However, the additional 20% penalty that applies before age 65 is waived. At this age, an HSA can function similarly to a traditional Individual Retirement Account (IRA) for non-medical withdrawals, where distributions are taxed as ordinary income.

Withdrawing Your HSA Funds

Accessing your HSA funds for qualified medical expenses can be done through several convenient methods. Many HSA administrators provide a dedicated debit card linked to the account, which can be used directly at healthcare providers, pharmacies, or for other eligible purchases. Some providers also offer checks that allow you to pay healthcare bills directly from your HSA. Online portals frequently provide options for direct payments to providers or electronic transfers to your personal bank account.

Individuals can also pay for qualified medical expenses out-of-pocket and then reimburse themselves from their HSA at a later date, with no deadline for reimbursement. The only requirement is that the expense must have been incurred after the HSA was established. This strategy can be particularly beneficial for allowing HSA funds to continue growing tax-free through investments.

Maintaining detailed records for all HSA withdrawals and corresponding qualified medical expenses is important. While you do not need to submit these records with your tax return, they are essential in case of an IRS audit. Key documents to retain include receipts, explanations of benefits (EOBs) from your insurance provider, and any medical diagnosis letters that support the medical necessity of an expense.