How Does HSA Work With Prescriptions?

A Health Savings Account (HSA) functions as a tax-advantaged savings vehicle designed for healthcare costs. It is exclusively available to individuals enrolled in a High-Deductible Health Plan (HDHP). Funds can be contributed, grow, and be withdrawn tax-free, provided they are used for qualified medical expenses, including prescription medication costs.

Determining Eligible Prescription Expenses

Understanding what qualifies as an eligible prescription expense is important for HSA utilization. The Internal Revenue Service (IRS) defines qualified medical expenses in Publication 502 as costs incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. This definition encompasses many prescription medications.

Prescription drugs, whether brand-name or generic, are eligible expenses. Insulin, even when purchased over-the-counter, is a qualified medical expense. Due to legislative changes in 2020, most over-the-counter (OTC) medications, such as pain relievers, cold and flu remedies, and allergy medications, are now eligible without requiring a prescription from a doctor. This broadened the scope of everyday healthcare items that can be paid for with HSA funds.

Conversely, some items are not eligible. Expenses primarily for general health, such as vitamins or nutritional supplements not prescribed to treat a specific medical condition, do not qualify. Cosmetic procedures or items not directly related to preventing or treating an illness or physical condition are excluded.

Methods for Using Your HSA Funds

Using HSA funds for eligible prescription expenses can be accomplished through several methods. The most direct approach involves using an HSA debit card, which functions similarly to a regular debit card. This card can be presented at the pharmacy or other healthcare providers to pay for prescriptions directly from your HSA balance. Many pharmacies and healthcare facilities accept these cards, allowing for immediate payment at the point of sale.

Alternatively, individuals can pay for eligible prescription expenses out-of-pocket using personal funds and then reimburse themselves from their HSA. This method offers flexibility, as there is no time limit for requesting reimbursement for expenses incurred after the HSA was established. To initiate a reimbursement, account holders log into their HSA provider’s online portal or mobile application, enter the expense details, and select a preferred reimbursement method, such as direct transfer to a linked bank account or a check request. While some providers may not require immediate submission of receipts for reimbursement, it is important to retain all documentation for tax purposes.

Maintaining Essential Records for HSA Spending

Maintaining records for HSA-related prescription spending is a compliance requirement. Although HSA administrators may not always require receipts for every transaction, individuals are solely responsible for substantiating that withdrawals were used for qualified medical expenses. This record-keeping is important in the event of an IRS audit, which can occur several years after a tax return is filed.

Essential documentation to retain includes itemized pharmacy receipts detailing the date of service, the specific medication purchased, and the amount paid. Explanation of Benefits (EOB) statements from your health insurance provider are also important, as they outline how your plan processed the claim and the amount you owe. For any over-the-counter items that required a doctor’s prescription for eligibility, a copy of that prescription should also be kept.

Organizing these records, whether through digital copies, dedicated folders, or using online tools provided by HSA custodians, helps ensure easy access and compliance. If an expense cannot be proven as qualified during an audit, the withdrawal may be subject to income tax and a 20% penalty if the account holder is under 65.