Where to Spend HSA Money and What Expenses Are Qualified

A Health Savings Account (HSA), linked to a high-deductible health plan (HDHP), allows individuals to manage healthcare costs with significant tax advantages. Funds contributed to an HSA grow and can be withdrawn tax-free for qualified medical expenses. This triple tax benefit—tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible expenses—makes understanding permissible uses of HSA funds important.

Understanding Qualified Medical Expenses

A “qualified medical expense” is defined by Internal Revenue Service (IRS) guidelines as costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. These expenses are outlined in IRS Publication 502, which serves as a foundational reference for what constitutes medical care for tax purposes. For an expense to be qualified, it must primarily be for medical care and not merely for general health improvement or cosmetic purposes.

Eligible Healthcare Services and Treatments

HSAs cover a wide array of eligible healthcare services and treatments.
Routine doctor visits, hospital stays, and surgical procedures.
Diagnostic tests, such as X-rays and laboratory work.
Mental health services, including therapy and counseling, acknowledging their importance in overall well-being.
Alternative and rehabilitative treatments like chiropractic care, physical therapy, and acupuncture.
Dental care, encompassing cleanings, fillings, and orthodontia.
Vision care, such as eye exams and corrective surgeries like LASIK.

Eligible Medical Products and Supplies

HSAs can be used for a variety of qualified medical products and supplies.
Prescription medications are a primary eligible expense.
Over-the-counter (OTC) medicines and drugs, made eligible by the CARES Act without requiring a prescription. This expansion includes common items like pain relievers, cold and flu medications, and digestive aids.
Medical devices, such as crutches, wheelchairs, and blood sugar monitors.
First-aid supplies, diagnostic kits like pregnancy tests, and feminine hygiene products also became eligible under the CARES Act. These inclusions broaden the scope of items that can be purchased with HSA funds, making it easier for individuals to cover everyday health-related purchases.

Qualified Insurance Premiums and Special Care Costs

While most health insurance premiums are not qualified medical expenses, certain specific types can be paid with HSA funds.
Long-term care insurance premiums are eligible, subject to annual age-based limits set by the IRS.
Premiums for COBRA, which allows for temporary continuation of employer-sponsored health coverage, are also qualified.
Health insurance premiums paid while receiving federal or state unemployment benefits also qualify.
For individuals aged 65 or older, HSA funds can be used to pay premiums for Medicare Parts A, B, and D, as well as Medicare Advantage plans. However, premiums for Medicare supplemental policies, such as Medigap, are not eligible.
Beyond premiums, costs associated with long-term care services, including nursing home care and home care for medical reasons, can also be covered by HSA funds.

Non-Qualified Expenses and Documentation Requirements

General health expenses, such as vitamins or nutritional supplements taken for overall well-being without a specific medical diagnosis, are not qualified. Cosmetic procedures are excluded unless medically necessary to correct a deformity resulting from a congenital abnormality, injury, or disease. Health club dues, toiletries, and most over-the-counter medications not covered by the CARES Act’s expansion are also non-qualified.

Using HSA funds for non-qualified expenses incurs a penalty if the account holder is under age 65. Such distributions are subject to ordinary income tax and an additional 20% penalty. For individuals aged 65 or older, non-qualified distributions are subject to income tax but not the 20% penalty.

Maintaining records of all HSA expenditures is important. This includes retaining receipts, Explanation of Benefits (EOB) statements from insurance providers, and any other relevant documentation to substantiate that expenses are qualified. These records are crucial for tax compliance and in the event of an IRS audit.