HSA Receipts: How Long Should You Keep Them?

Health Savings Accounts (HSAs) offer a unique and advantageous way to manage healthcare costs. These accounts provide a triple tax benefit: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. HSAs are available to individuals enrolled in a high-deductible health plan (HDHP) and serve as a tool for saving and spending on eligible medical costs.

Importance of Retaining HSA Receipts

Funds distributed from an HSA are only tax-free if they are used for qualified medical expenses. Receipts serve as the primary documentation to prove that distributions were for legitimate healthcare costs. Without adequate receipts, any distributions from an HSA may be considered taxable income. If the account holder is under age 65, these unsubstantiated withdrawals can also be subject to an additional 20% penalty. This risk applies regardless of when the distribution occurs, whether immediately after the expense or years later as a reimbursement for a past out-of-pocket payment.

Recommended Retention Periods for HSA Receipts

The general guideline from the IRS for retaining tax records is three years from the date you filed your original tax return, or two years from the date you paid the tax, whichever is later. This period covers the time the IRS usually has to conduct an audit. For HSA receipts, this means you should keep documentation for at least three years after any tax-free distribution is made.

However, the nature of HSAs often necessitates a longer retention strategy. Since you can incur a qualified medical expense now and reimburse yourself from your HSA many years later, the need for the receipt is tied to the distribution date, not solely the expense date. For instance, if you pay for a medical service today but wait until retirement to withdraw funds from your HSA for reimbursement, you would need the original receipt at the time of that later distribution. For this reason, many financial professionals recommend keeping HSA receipts for a longer duration, potentially indefinitely, if you intend to save them for future tax-free reimbursements.

While the primary audit period is three years, the IRS can extend this timeframe under certain conditions. If there is a substantial understatement of income, the audit period can extend to six years. There is no statute of limitations if a fraudulent return was filed or if no return was filed at all. General record-keeping guidance and details on what constitutes a qualified medical expense are available in IRS publications.

Best Practices for Managing HSA Receipts

Effectively managing HSA receipts involves ensuring the documentation contains necessary information. Each receipt for a qualified medical expense should clearly show the date of service, the name of the service provider, a detailed description of the service or item, the amount paid, and the patient’s name.

Storing receipts digitally offers significant advantages over physical storage. Scanning and saving receipts in a structured manner, such as in cloud storage or dedicated computer folders, enhances accessibility and durability. Digital copies are less prone to loss or damage and can be easily searched and organized by year or expense category. While physical copies are permissible, they require more space and are susceptible to environmental factors.

It is also beneficial to maintain a separate log or spreadsheet to track both your qualified medical expenses and corresponding HSA distributions. This practice helps prevent common errors, such as inadvertently claiming the same expense as an itemized deduction on your tax return if it has already been reimbursed tax-free from your HSA.