How to Pay Using an HSA for Medical Expenses

A Health Savings Account (HSA) is a specialized savings account offering tax advantages for individuals covered by a High-Deductible Health Plan (HDHP). Its primary purpose is to help people save and pay for qualified medical expenses. Contributions made to an HSA are tax-deductible, or pre-tax if made through payroll deductions, which can reduce taxable income.

The funds within an HSA grow tax-free through interest or investments, and withdrawals are also tax-free when used for eligible healthcare costs. This unique combination of tax benefits makes HSAs a valuable tool for managing healthcare finances.

Understanding Qualified Medical Expenses

Qualified medical expenses are costs incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, as well as for treatments affecting any part or function of the body. Common examples include fees for doctors, dentists, and hospitals, prescription medications, and vision care services like eye exams and contact lenses.

Other eligible expenses can encompass mental health services, chiropractic care, acupuncture, and certain over-the-counter medications and menstrual care products. Expenses for cosmetic procedures or general health items, such as gym memberships, are not covered unless a medical professional prescribes them for a specific medical condition. For a comprehensive list, consult IRS Publication 502.

Methods for Using Your HSA Funds

Individuals have several options for using HSA funds. Many HSA providers issue a dedicated debit card, usable directly at the point of service, such as a doctor’s office, pharmacy, or eligible online merchants.

Another approach is to pay for qualified expenses out-of-pocket using personal funds and then reimburse oneself from the HSA. This can be done by transferring money from the HSA to a personal bank account via online transfer. Some HSA administrators also offer online bill pay features, allowing direct payments to healthcare providers from the HSA account.

Documentation and Tax Considerations

Maintaining thorough records for all HSA transactions is important for tax compliance. Individuals should keep documents such as itemized bills from healthcare providers, receipts for purchases, and Explanation of Benefits (EOB) statements from their insurance company. These records serve as proof that distributions were used exclusively for qualified medical expenses, which is necessary in case of an IRS inquiry or audit.

For tax reporting, individuals will receive Form 1099-SA, which details distributions from their HSA, and Form 5498-SA, reporting contributions. This information is then used to complete Form 8889, which must be filed with the federal income tax return (Form 1040) to report HSA contributions and distributions. Using HSA funds for non-qualified expenses before age 65 results in the withdrawal being subject to ordinary income tax and an additional 20% penalty. After age 65, the 20% penalty is waived, but non-qualified withdrawals remain subject to income tax.