How to Withdraw Funds From an HSA Card

A Health Savings Account (HSA) provides a savings vehicle for individuals enrolled in a high-deductible health plan. Funds contributed to an HSA are generally tax-deductible, grow tax-free, and can be withdrawn tax-free when used for qualified medical expenses. The HSA card allows direct payment for various healthcare services and products, helping individuals pay for eligible out-of-pocket medical expenses.

Understanding Eligible Medical Expenses

Using HSA funds appropriately requires understanding “eligible medical expenses” as defined by Internal Revenue Service (IRS) guidelines. These are costs incurred primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. The account holder is responsible for determining if an expense qualifies, and expenses must not be reimbursed by another insurance plan.

Many common healthcare services and products are eligible. These include doctor visits, prescription medications, dental care (cleanings, fillings, braces), and vision care (eye exams, prescription eyeglasses, contact lenses, LASIK surgery). Certain over-the-counter medications and menstrual care products also qualify. Funds can also cover services like chiropractic care, acupuncture, physical therapy, and qualified long-term care insurance premiums, subject to specific limits.

Eligible expenses also include emergency services like ambulance fees and hospital visits, and family planning products such as birth control and fertility treatments. Medical equipment, supplies, and diagnostic services like X-rays and MRIs are covered. However, items for general health improvement or cosmetic procedures not medically necessary are usually not eligible.

Methods for Accessing HSA Funds

Accessing HSA funds involves several methods. The most common is using an HSA-linked debit card at the point of sale. This card functions like a standard debit card, allowing direct payment for eligible medical expenses at doctor’s offices, pharmacies, or other healthcare providers. When using the card, an individual can select “credit” and sign, or choose “debit” and enter a Personal Identification Number (PIN); some PIN transactions may incur a fee.

Many HSA providers facilitate direct payments to medical providers through online portals or mobile applications. This allows account holders to manage funds electronically and initiate payments without a physical card. Some HSA administrators also offer the option to request checks directly from the account, which can be used to pay healthcare providers or for reimbursement.

Another option is the reimbursement process. An individual pays for a qualified medical expense out-of-pocket using personal funds, then withdraws the equivalent amount from their HSA. This is useful if the HSA lacks sufficient funds at the time of service or if the account holder prefers to let funds grow.

To initiate reimbursement, account holders typically log into their HSA account online, submit a request form, and provide documentation like receipts or invoices. Funds are then transferred to their linked personal bank account, or in some cases, can be withdrawn as cash from an ATM using the HSA debit card. There is generally no time limit for requesting reimbursement for past qualified medical expenses, provided the expense was incurred after the HSA was established.

Documentation and Tax Considerations

Maintaining records is a responsibility for HSA account holders to ensure IRS compliance. All receipts and detailed documentation for qualified medical expenses paid with HSA funds, or for which reimbursement is sought, should be retained indefinitely. These records prove distributions were used for eligible expenses, which is crucial in an IRS audit. The IRS does not require these records to be submitted with tax returns, but they must be available upon request.

When HSA funds are used for qualified medical expenses, distributions are tax-free and penalty-free. This is a primary benefit of Health Savings Accounts, allowing individuals to pay for healthcare costs with pre-tax dollars. However, using HSA funds for non-qualified expenses carries significant tax implications.

If funds are withdrawn for purposes other than eligible medical expenses, the distributed amount is subject to income tax. If the account holder is under age 65, these non-qualified withdrawals incur an additional 20% penalty tax. For example, a $1,000 non-qualified withdrawal would be added to taxable income and also subject to a $200 penalty. Exceptions to this penalty include distributions made after the account holder reaches age 65, becomes disabled, or upon their death. After age 65, non-qualified withdrawals are subject to income tax but are exempt from the 20% penalty.

HSA administrators report distributions to the IRS on Form 1099-SA, sent to the account holder annually. Account holders must report their HSA activity on Form 8889, “Health Savings Accounts (HSAs),” when filing their federal income tax return. This form reports contributions, distributions, and calculates any taxable amounts or penalties related to non-qualified withdrawals.