Navigating the realm of healthcare expenses can be a complex and costly journey, but Health Savings Accounts (HSAs) can provide a beacon of financial relief. These versatile accounts offer unique tax advantages for those who understand the rules and guidelines governing their use. In this blog, we will dive into the HSA spending rules and how you can leverage them to your benefit.
HSA funds may be used on a tax-free basis if they pay for qualified medical expenses that were incurred after the HSA was established and are not paid or reimbursed by another source. Individuals can use their HSA funds for any purpose. However, if HSA funds are not used for qualified medical expenses, they are taxable as income to the HSA owner and subject to a 20% penalty unless the HSA owner is over age 65, disabled, or deceased.
QUALIFIED MEDICAL EXPENSES
For HSA purposes, qualified medical expenses generally include the expenses listed in IRS Publication 502 and are limited to those that primarily alleviate or prevent a physical or mental disability or illness. They do not include expenses that are merely beneficial to general health. Insurance premiums are not qualified medical expenses for HSAs, with some narrow exceptions. However, HSA funds can be used to pay for over-the-counter medicines and drugs on a tax-free basis.
In general, HSA funds can be used to pay for the qualified medical expenses of the HSA owner and their spouse and tax dependents, including dependent children up to age 19 (age 24 for full-time students).
TIMING RULES
Individuals do not need to meet the eligibility criteria for making HSA contributions to receive a tax-free distribution from their HSAs. In addition, spouses and dependents do not have to be HSA-eligible to have their qualifying medical expenses reimbursed on a tax-free basis.
There is no deadline for when an HSA owner may take a withdrawal. All unused funds remain in an HSA from year to year and may be used for qualified medical expenses incurred in the future. HSA owners have sole discretion for how and when to use HSA funds. The HSA custodian or trustee tracks and reports all HSA activity.
ELIGIBLE MEDICAL EXPENSES
- HSA withdrawals are tax-free if they are used for qualified medical expenses that are not paid or reimbursed by another source.
- Health insurance premiums are not qualified medical expenses, with some limited exceptions.
- Over-the-counter medicines and drugs are qualified medical expenses.
WITHDRAWAL TIMING
- HSA funds cannot be used for expenses incurred prior to the date the HSA was established.
- For medical expenses incurred after an HSA is established, there is no time limit for when an HSA owner may take a withdrawal.
- HSA owners do not have to be eligible for HSA contributions to take a tax-free withdrawal.
CONCLUSION
Health Savings Accounts (HSAs) offer a tax-advantaged way to manage medical expenses. Use HSA funds for qualified medical expenses incurred after account establishment to enjoy tax-free benefits, but remember that using them for non-qualified expenses results in taxes and penalties, except for specific exemptions. HSAs provide flexibility and financial control, making them a valuable tool for healthcare cost management.
If you have additional questions about HSA spending rules, or any other benefit questions, contact us to speak to a consultant. You can also follow us on Twitter or LinkedIn or here on the FBS Blog for more employee health and wellness trends.
