How to Use an HSA for Medical Expenses

A Health Savings Account (HSA) offers a unique financial tool for managing healthcare costs while providing substantial tax benefits. It functions as a savings account specifically designed for individuals enrolled in a high-deductible health plan (HDHP), allowing tax-deductible contributions. Funds within an HSA grow tax-free, and distributions for qualified medical expenses are also tax-free, creating a “triple tax advantage” that sets it apart from many other savings vehicles. This article will detail what constitutes a qualified medical expense, the various methods for accessing your HSA funds, and the importance of maintaining proper documentation.

Identifying Qualified Medical Expenses

Using an HSA effectively begins with a clear understanding of what the Internal Revenue Service (IRS) considers a “qualified medical expense.” These are generally costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, and treatments affecting any part or function of the body. IRS Publication 502 provides guidance on these eligible expenses.

Common examples of qualified medical expenses encompass routine medical care such as doctor visits, prescription medications, and hospital services. Dental care, including cleanings, fillings, braces, and extractions, along with vision care like eye exams, prescription eyeglasses, and contact lenses, are also generally covered. Preventative care, which helps maintain overall health and prevent illness, also qualifies.

This includes certain over-the-counter (OTC) medications and menstrual care products, which became eligible without a prescription following the CARES Act of 2020. Medical equipment, such as crutches, wheelchairs, and breast pumps, also qualify. Expenses for services like chiropractic care, acupuncture, and physical therapy are eligible.

Certain expenses are not qualified medical expenses. Cosmetic procedures, unless necessary to correct a deformity from a congenital abnormality, injury, or disfiguring disease, do not qualify. General health supplements, vitamins, or herbal remedies are ineligible unless prescribed by a medical practitioner to treat a diagnosed medical condition. Health club dues or gym memberships are not covered unless specifically prescribed for a medical condition. Medical expenses incurred before the HSA was established are not eligible for reimbursement.

Accessing Your HSA Funds

Once an expense is identified as qualified, there are several methods to access your HSA funds. Many HSA providers issue a dedicated debit card, linked directly to your account, which can be used at the point of service. This allows for immediate payment at doctor’s offices, pharmacies, and other healthcare merchants, much like a standard debit card. Some providers also offer digital wallet integration, allowing you to use your HSA card through platforms like Apple Pay or Google Wallet.

Another common method involves online bill pay features offered by HSA administrators. Through the provider’s online portal or mobile application, you can directly pay medical bills to healthcare providers. This eliminates the need for physical checks and offers a secure way to manage payments from your HSA. Many online platforms also allow you to track your account activity and balances.

An option is to pay for qualified medical expenses out-of-pocket using personal funds, and then reimburse yourself from your HSA later. This strategy allows your HSA funds to remain invested and potentially grow tax-free, maximizing the long-term benefits of the account. To initiate a reimbursement, you log into your HSA account online, provide details of the expense including the amount and date, and select your preferred reimbursement method. Options for receiving reimbursement include electronic transfers to a linked personal bank account, or a check from the HSA provider. There is no time limit for requesting HSA reimbursements, meaning you can pay yourself back days, months, or even decades after incurring the expense, provided the HSA was already established when the expense occurred.

Maintaining Proper Documentation

Maintaining records for all HSA transactions is important, particularly for qualified medical expenses. Although you are not required to submit receipts with your annual tax return, the IRS mandates that account holders retain sufficient documentation. This documentation serves as proof that distributions from your HSA were exclusively used for qualified medical expenses, were not reimbursed from another source, and were not claimed as an itemized deduction on your taxes.

The types of documentation to keep include detailed receipts from healthcare providers, pharmacies, or other merchants for every qualified expense. Explanation of Benefits (EOB) statements from your health insurance provider are also important, as they confirm that an expense was not paid by your insurance. For certain items, such as over-the-counter medications that require a prescription to be eligible, retaining the prescription is also necessary.

These records are important in the event of an IRS audit, where you would need to substantiate that all HSA withdrawals were for legitimate qualified medical expenses. Failure to provide adequate documentation for non-qualified withdrawals can result in the distributed amount being subject to income tax and a 20% penalty, if you are under age 65. Best practices for record-keeping include creating both digital and physical copies of documents, or utilizing online expense trackers and secure platforms offered by HSA providers to store receipts. While some suggest keeping records for at least three years, aligning with the general tax audit period, many financial professionals recommend retaining HSA records for seven years or even longer, especially if planning long-term reimbursements.