How to Use My HSA Funds for Qualified Medical Expenses
Navigate your HSA effectively. Understand qualified medical expenses, access funds correctly, and manage tax considerations for healthcare savings.
A Health Savings Account (HSA) is a savings vehicle designed to help individuals manage healthcare costs with tax advantages. This personal account allows you to set aside funds on a tax-advantaged basis for qualified medical expenses. HSAs are typically linked with high-deductible health plans (HDHPs), providing a financial cushion to cover out-of-pocket costs before the health plan’s full coverage begins. HSA funds offer a triple tax benefit: tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible medical expenses.
Eligible Medical Expenses
The Internal Revenue Service (IRS) outlines guidelines defining medical expenses as costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body.
These expenses must primarily alleviate or prevent a physical or mental disability or illness, not merely benefit general health.
Eligible expenses include a wide array of medical, dental, and vision care such as doctor visits, hospital stays, prescription medications, and over-the-counter drugs. Over-the-counter drugs no longer require a prescription for reimbursement.
Dental services like cleanings, fillings, orthodontia, and dentures are covered, as are vision expenses including eye exams, prescription eyeglasses, contact lenses, and LASIK surgery. Mental health services, such as psychiatric care, psychological therapy, and substance abuse treatment, are also considered eligible.
Certain insurance premiums can also be paid with HSA funds, including:
Qualified long-term care insurance
COBRA continuation coverage
Health coverage while receiving unemployment benefits
Medicare premiums (Parts A, B, and D) for individuals aged 65 or older
Other eligible items range from ambulance services and crutches to breast pumps and smoking cessation programs. Expenses incurred before your HSA was established are generally not eligible for tax-free withdrawal.
Some expenses are not eligible for HSA use. These include cosmetic procedures unless medically necessary to correct a deformity or treat a disease.
General health supplements or vitamins are not covered unless prescribed by a medical professional to treat a diagnosed condition. Personal use items like toothpaste, dental floss, and general toiletries, along with gym memberships not prescribed for a specific medical condition, are also excluded.
Methods for Using Your HSA Funds
Accessing your HSA funds for qualified medical expenses can be done through several methods. The most common involves using an HSA-specific debit card.
This card functions like a standard debit card and can be used directly at healthcare providers, pharmacies, or for online purchases of eligible medical items. It offers immediate payment and simplifies covering out-of-pocket costs.
Another method is reimbursement, where you pay for an eligible medical expense out-of-pocket and then reimburse yourself from your HSA. This strategy allows your HSA funds to remain invested and grow tax-free for a longer period.
There is no time limit for reimbursing yourself, provided the expense was incurred after your HSA was established.
The reimbursement process involves logging into your HSA account online, submitting expense details, and providing supporting documentation like receipts or Explanation of Benefits (EOB) statements. Funds can then be transferred electronically to your linked bank account, or some providers may offer the option to mail a check.
Many HSA providers also facilitate direct online bill payments, allowing you to pay healthcare providers directly from your HSA account. This can be a convenient option for managing medical bills electronically.
Some HSA administrators offer checkbooks, allowing you to write checks directly from your HSA for eligible expenses or to reimburse yourself.
Ensuring the expense meets IRS qualification criteria is essential to maintain the tax-free status of the withdrawal.
Tax Considerations and Documentation
Using your HSA funds correctly for qualified medical expenses ensures withdrawals are completely tax-free. This is a key benefit. However, if funds are withdrawn for purposes other than qualified medical expenses, the tax treatment changes.
Any withdrawals for non-eligible expenses are subject to income tax. Furthermore, if you are under the age of 65, these non-qualified withdrawals incur an additional 20% penalty.
Once you reach age 65, the 20% penalty is waived, but withdrawals for non-medical reasons will still be taxed as ordinary income.
Maintaining detailed records is important for all HSA transactions, even if you reimburse yourself years after the expense was incurred. You should keep all receipts, invoices, and Explanation of Benefits (EOB) statements that prove the expense was qualified.
This documentation is important for tax purposes and in the event of an IRS audit, as you are responsible for substantiating that all distributions were for eligible medical expenses.
Your HSA trustee or custodian will report distributions to you and the IRS on Form 1099-SA, and you will report your HSA activity on IRS Form 8889.