How Long Should You Keep HSA Receipts for Taxes?

A Health Savings Account (HSA) offers a tax-advantaged way to save and pay for qualified medical expenses. These accounts allow contributions to be made on a pre-tax basis, grow tax-free, and distributions are tax-free when used for eligible healthcare costs. Maintaining accurate records of how funds are used is important for compliance with tax regulations. Understanding the requirements for keeping these records helps account holders manage their HSA effectively and avoid potential issues.

Why Keep HSA Receipts

Retaining receipts for Health Savings Account (HSA) distributions is important to demonstrate that withdrawals were used for qualified medical expenses. The Internal Revenue Service (IRS) requires substantiation that funds were for eligible healthcare costs. Without proper documentation, the tax-free status of these withdrawals can be jeopardized. This record-keeping is essential for audit preparedness, ensuring you can verify your HSA expenditures if questioned.

HSA Receipt Retention Periods

The length of time you should keep HSA receipts generally aligns with the IRS’s record retention guidelines for tax documents. For most situations, tax records should be kept for at least three years from the date you filed your original tax return, or two years from the date you paid the tax, whichever is later. This three-year period is the general statute of limitations for the IRS to assess additional tax.

Specific circumstances can extend this period. For instance, if significant income was not reported, the IRS may have six years to assess tax. In cases of a fraudulent return or if no return was filed, records should be kept indefinitely. Given these variations and the potential for long-term HSA use, some advisors suggest retaining all tax records, including HSA receipts, for at least seven years. Additionally, since HSA funds can reimburse qualified medical expenses incurred at any time after the account was established, some individuals keep receipts for the life of the account, or indefinitely, especially when planning future reimbursements.

What to Keep and How to Store

When maintaining HSA records, each receipt or supporting document should contain specific details. A valid record should include the date of service or purchase, a clear description of the service or item, the amount paid, and the name of the service provider or merchant. For prescription medications, the prescription number and the name of the patient are beneficial to include. Insurance Explanation of Benefits (EOB) statements can also serve as supporting documentation for services covered under a high-deductible health plan.

Storing these records can be done through various methods, both physical and digital. Physical copies can be organized in labeled folders by year, by expense type, or in a system for easy retrieval. For digital storage, scanning paper receipts into digital files prevents damage or loss and makes them accessible. Secure cloud storage, dedicated HSA tracking software, or personal computer files can be used, with strong passwords and two-factor authentication recommended. An organized system ensures documentation is readily available for verification.

Consequences of Unsubstantiated Distributions

If an HSA distribution cannot be substantiated as a qualified medical expense, significant financial and tax implications can arise. The amount withdrawn for non-qualified expenses becomes taxable income and must be included in your gross income for the year. This can increase your overall tax liability. In addition to being taxed, these unsubstantiated distributions are typically subject to an additional 20% penalty if the account holder is under age 65.

For example, a $500 non-qualified withdrawal could result in $100 in penalties, plus the amount added to your taxable income. This penalty discourages using HSA funds for non-medical purposes before retirement age. The 20% penalty is waived once the account holder reaches age 65 or becomes disabled, but the distribution remains taxable income if not used for qualified medical expenses. Failing to maintain adequate records can lead to these consequences during an IRS audit.