HSA Distributions

Using Your HSA

You always have the option to choose when and when not to use your Health Savings Account (HSA) dollars. You may pay for qualified medical expenses with after-tax dollars, allowing your HSA balance to grow tax-free. Many HSA participants elect to pay smaller expenses with after-tax dollars, allowing their balances to grow for the future.

Just like a checking account, you can only access funds once they are posted to your account. As additional funds are added to your account via your deposits, you can reimburse yourself for qualified medical expenses paid for out of pocket, so long as those expenses occur after the date of the establishment of your HSA.

Qualified Expenses

Your HSA funds can be used tax-free to pay for out-of-pocket qualified medical expenses, even if the expenses are not covered by your High Deductible Health Plan (HDHP), and include:

  • HDHP deductibles and coinsurance;
  • dental visits;
  • orthodontics;
  • eyeglasses;
  • premiums for long-term care insurance, COBRA coverage, and Medicare Parts A and B
  • and over-the-counter drugs that are prescribed by a doctor.

Refer to IRS Publication 502 for a more complete list of qualified medical expenses.

You are responsible for deciding whether the payment is for a qualified medical expense. Therefore, you should become familiar with the Internal Revenue Service (IRS) definitions and also keep your receipts in case you need to defend your expenditures or decisions during an audit.

Qualified Expenses by Family Members

Your HSA funds can be used to pay for out-of-pocket qualified medical expenses incurred by your family members who qualify as your dependents for tax purposes. The IRS has not changed its definition of a dependent for health savings accounts. According to the IRS definition, a dependent is a qualifying child (daughter, son, stepchild, sibling or stepsibling or any descendant of these) who:

  • has the same principal place of abode as the covered employee for more than one-half of the taxable year,
  • has not provided over one-half of their own support during the taxable year and
  • is not yet age 19 (or not yet age 24 if a student) at the end of the tax year or is permanently and totally disabled.

Non-Qualified Expenses

If you take a non-qualified distribution, you are subject to ordinary income tax on the distribution and a 20% penalty tax. The penalty may not apply:

  • if you are age 65 or older,
  • if you are disabled or
  • for the year in which you die.

The IRS requires that you confirm your distributions are for qualified medical expenses. It is your responsibility to keep all documents (such as receipts) that show how you used your HSA, including for non-qualified transactions, and self-report accordingly on your annual tax return.

Expenses Must Be Incurred After HSA "Establishment Date"

The "Establishment Date" of an HSA is important because you can only receive tax-free distributions from your HSA for qualified medical expenses incurred after the date the HSA is considered established. Generally, the “Establishment Date” is the later of the effective dates of your qualifying HDHP coverage or the date you provide evidence of intent to open the account (e.g., completion of a form or application requiring your signature that acknowledges your desire to open an HSA). Because you are ultimately responsible for determining which expenses are reimbursable from your HSA, you should consult with your personal tax advisor to determine how IRS guidance on this issue should be applied to your specific situation.

Using HSA Funds When Not Enrolled In High Deductible Health Insurance

When you are no longer covered by a qualified HDHP, you are not eligible to contribute to an HSA. However, any distributions you make from an existing HSA for qualified expenses continue to be tax-free and excludable from your gross income. So if you choose in a future year to enroll in a non-HDHP medical insurance option, your HSA funds will still be available to pay for qualified health care expenses.

Domestic Partners

The IRS does not consider a domestic partner a spouse, regardless of any state law exceptions. Unless your domestic partner qualifies as your dependent under the federal tax laws you cannot withdraw funds tax-free to pay for your domestic partner's qualified health care expenses.