How to Take Money Out of a Health Savings Account
Navigate the process of withdrawing funds from your Health Savings Account (HSA). Understand eligible expenses, tax implications, and vital documentation.
A Health Savings Account (HSA) functions as a savings account specifically designed for medical expenses, offering tax benefits for eligible individuals. Funds contributed to an HSA can grow tax-free and, when used for qualified medical expenses, can be withdrawn without incurring taxes. This financial tool allows individuals to save for present and future healthcare needs.
Understanding Qualified Medical Expenses
To utilize an HSA effectively, understanding what constitutes a “Qualified Medical Expense” (QME) is important. The Internal Revenue Service (IRS) defines these expenses as costs for medical care, dental care, and vision care, primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Common examples include doctor visits, hospital stays, prescription medications, and dental work such as cleanings and braces. Over-the-counter medications and menstrual care products also qualify as QMEs.
Certain health insurance premiums can also be considered qualified medical expenses under specific circumstances. These include premiums for COBRA continuation coverage, qualified long-term care insurance (subject to limitations), and Medicare premiums. General health insurance premiums, cosmetic procedures, and general health products without a prescription do not qualify.
Methods for Withdrawing Funds
Accessing funds from your HSA for medical expenses can be done through various methods provided by your HSA custodian. Many HSA providers issue a dedicated debit card, allowing direct payment at the point of service for qualified medical expenses. This card works similarly to a regular debit card, deducting funds directly from your HSA balance.
Account holders can also initiate online transfers from their HSA to a linked personal bank account. This method is often used for reimbursing out-of-pocket expenses already paid. Some HSA custodians provide the option to request a check drawn from your HSA, which can be mailed directly to a healthcare provider or to you for reimbursement. For expenses paid out-of-pocket, you can submit a reimbursement claim to your HSA administrator by providing receipts or other documentation, and the funds will then be transferred to your personal account.
Tax Reporting and Consequences
HSA withdrawals have specific tax implications depending on how the funds are used. Distributions used to pay for qualified medical expenses are not subject to federal income tax. This tax-free status allows individuals to pay for healthcare.
If HSA funds are withdrawn for non-qualified expenses, such distributions are included in your gross income and are subject to ordinary income tax. If the account holder is under age 65, these non-qualified withdrawals incur an additional 20% penalty tax.
HSA custodians are required to report all distributions to both the account holder and the IRS on IRS Form 1099-SA, “Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.” Account holders then use IRS Form 8889, “Health Savings Accounts (HSAs),” when filing their federal income tax return to report their HSA contributions and distributions. On Form 8889, you indicate which distributions were used for qualified medical expenses, determining the taxable amount. The responsibility rests solely with the account holder to prove that withdrawals were for qualified medical expenses if questioned by the IRS.
Essential Documentation and Record Keeping
Maintaining thorough records of all HSA-related transactions is important for compliance and potential IRS review. These records serve as proof that distributions were used exclusively for qualified medical expenses. Should the IRS audit your tax return, you may be asked to provide documentation to substantiate your claims.
Key documents to retain include itemized medical bills, Explanation of Benefits (EOBs) from your health insurer, pharmacy receipts, and prescriptions for any over-the-counter medications purchased with HSA funds. It is also advisable to keep records of payments made, whether through an HSA debit card or personal funds for later reimbursement. Keep these records for at least three years from the date you file your tax return. Organizing these documents, whether physically in a dedicated file or digitally using scanning and cloud storage, can streamline the process of substantiating expenses if needed.