What Can You Spend Your HSA Money On?

A Health Savings Account (HSA) is a tax-advantaged savings account for individuals covered under high-deductible health plans. The funds contributed to an HSA are not subject to federal income tax at the time of deposit. This account allows you to pay for current health expenses and save for future qualified medical costs on a tax-free basis.

The Standard for Qualified Medical Expenses

The Internal Revenue Service (IRS) defines a qualified medical expense as a cost associated with the diagnosis, cure, mitigation, treatment, or prevention of disease. This standard also includes payments for treatments that affect any structure or function of the body. For an expense to be qualified, it must be primarily for alleviating or preventing a physical or mental defect or illness.

Costs that are merely beneficial to general health, such as vitamins or a vacation, do not meet this standard. It is the account holder’s responsibility to determine if an expense meets the IRS definition before using HSA funds. You can only use your HSA to pay for qualified medical expenses incurred after the account has been officially established, which generally means it has been opened and funded.

Common HSA Eligible Expenses

Medical Services and Equipment

A wide array of professional medical services are considered qualified expenses. This includes payments made to physicians, surgeons, dentists, chiropractors, and psychologists. Fees for hospital services, inpatient care, lab work, ambulance services, and nursing home care are also eligible.

The cost of medical equipment is another allowable use of HSA funds. This includes items such as:

• Crutches and wheelchairs
• Hearing aids and their batteries
• Diagnostic devices like blood sugar test kits
• Artificial limbs
• Guide dogs for the visually or hearing impaired

Dental and Vision Care

Dental and vision services are eligible for payment with HSA funds. For dental care, this includes routine cleanings, X-rays, fillings, extractions, orthodontia like braces, and artificial teeth. These expenditures are for the treatment and prevention of dental disease.

Similarly, costs associated with vision care are qualified. This covers routine eye exams, eyeglasses, and contact lenses. More significant procedures, such as laser eye surgery or other corrective surgeries, can also be paid for using your HSA.

Medications and Health Products

Prescription medications, including insulin, are a primary example of a qualified medical expense. The CARES Act of 2020 also permanently allows HSA funds to be used for over-the-counter (OTC) medications without a prescription, such as pain relievers, cold and flu medicine, and allergy products.

The scope of eligible products also extends to other health-related items. Menstrual care products, such as tampons and pads, are considered qualified medical expenses. Smoking cessation programs, prescribed weight-loss programs for a specific disease, and personal protective equipment like masks and hand sanitizer are also eligible.

Expenses Requiring Special Circumstances

Certain expenses can become eligible under specific conditions, often requiring a Letter of Medical Necessity (LMN) from a physician. An LMN certifies that a service or item is necessary to treat a specific medical condition. For example, a gym membership prescribed by a doctor to treat a disease like obesity could be eligible with an LMN, while a membership for general fitness is not.

Other examples include massage therapy, which is not covered unless a physician recommends it to treat a condition like chronic back pain. Similarly, home improvements, such as installing an accessibility ramp, can be qualified expenses. The cost is considered a medical expense to the extent it exceeds any increase in the home’s value.

Insurance Premiums

You generally cannot use your HSA to pay for insurance premiums, but the IRS makes specific exceptions. You can use HSA funds to pay for long-term care insurance premiums, subject to annual, age-based limits. Funds can also be used for COBRA continuation coverage or for healthcare coverage while you are receiving unemployment compensation.

The rules also change once you reach age 65. At that point, you can use your HSA to pay premiums for Medicare Parts A, B, and D, as well as Medicare Advantage plans. You can also pay for employer-sponsored retiree health plans. However, premiums for Medicare supplemental policies (Medigap) are not qualified medical expenses.

Ineligible Expenses and Non-Medical Withdrawals

Many common purchases are not considered qualified medical expenses, particularly items for general health or personal grooming. Cosmetic surgery is ineligible unless it is necessary to improve a deformity arising from a congenital abnormality, personal injury, or a disfiguring disease. General wellness items like non-prescription vitamins, toiletries, gym memberships for general fitness, and diet food are also not qualified.

Using HSA funds for a non-qualified expense results in tax consequences. The amount of the non-medical withdrawal must be included in your gross income for the year, making it subject to ordinary income tax. In addition, the IRS imposes a 20% penalty on the amount withdrawn if you are under the age of 65. This penalty does not apply if the distribution is made after you turn 65, become disabled, or die, though the amount is still treated as taxable income.

Payment Methods and Recordkeeping Requirements

Payment Methods

When you are ready to pay for a qualified medical expense, you have two main options. The most direct method is to use an HSA-linked debit card, which allows you to pay for eligible expenses directly from your HSA balance at the point of service.

The second method is to pay for the expense out-of-pocket and then reimburse yourself from your HSA. This approach offers flexibility, as you can pay with other methods and then request a distribution from your HSA administrator. There is no deadline to reimburse yourself for a past qualified medical expense, as long as the expense occurred after the HSA was established.

Recordkeeping

Regardless of the payment method, keeping good records is a responsibility of owning an HSA. The IRS may require you to prove that your distributions were used for qualified medical expenses. You should keep all relevant documentation, including itemized receipts from providers, invoices, and Explanation of Benefits (EOB) statements from your insurance company.

These records serve as proof in the event of an audit. A debit card transaction to a pharmacy is not sufficient; you need the receipt showing what was purchased. Many HSA administrators offer online tools to help you upload and organize these receipts, simplifying the process of maintaining proper documentation.