A health savings account (HSA) is one of the most advantageous ways to save money for the future, including for retirement. Its primary purpose, however, is to help accountholders save and pay for current or future healthcare expenses.
HSAs have three primary tax advantages, but one is conditional. Contributing to an HSA and growing an HSA (through interest and potentially through investing1) can bring you tax savings2, but when you spend your HSA funds, you can only realize tax savings for qualified medical expenses.
What are qualified medical expenses?
Qualified medical expenses are designated by the IRS. They include certain medical, dental, vision and prescription expenses you can pay for with your HSA (or other healthcare savings accounts) funds. Some qualifying expenses include deductibles, co-payments, flu shots, hearing aids, immunizations, physical exams and many more.
When you use your HSA funds to pay for qualified medical expenses, you are not taxed on the purchase. This is the third tax advantage of HSAs, and one that can save HSA accountholders hundreds (or even thousands) of dollars over the life of the HSA.
What are non-qualified medical expenses?
It is important to remember that not every medical, dental, vision or prescription expense is considered qualified. Non-qualifying expenses might include cosmetic procedures, veneers, teeth whitening, diet foods and many more.
To make things more complicated: some medical, dental, vision or prescription expenses may be qualified if certain requirements are met. For example, paying for aspirin over-the-counter is a non-qualified expense, but if the accountholder gets a prescription from a doctor for the aspirin, the expense is considered qualified.
And, of course, items such as TVs, concert tickets, phones, groceries, etc. are never qualified expenses for HSAs.
Who has the responsibility to oversee HSA fund purchases?
It is your responsibility as the HSA owner to ensure you are spending your HSA funds on qualified medical expenses. Neither your employer nor your HSA provider will ask for documentation to prove you are spending your HSA funds on qualified medical expenses.
However, the IRS may ask for proof that your HSA funds were spent appropriately.3 You should save receipts and keep careful records of how HSA funds are spent in case you are audited. HealthEquity allows members to easily and efficiently upload receipts to their account using the app or member portal.
If the IRS finds you spent your HSA funds on non-qualified medical expenses — or if you cannot prove the purchase was a qualified medical expense — the purchase will be subject to tax, and you could be charged an additional 20% tax penalty.
There is one exception: If you are age 65 or older, you can use your HSA funds for any purpose.4 If the expense is a non-qualified medical expense, you will be subject to income taxes, but you will not be subject to the 20% tax penalty. If you spend your HSA funds on qualified medical expenses, you will not be taxed.
To take full advantage of the tax benefits that come from having an HSA, you must follow the rules and guidelines set by the IRS. One of these rules is that you should only spend your HSA funds on qualified medical expenses or you could face tax penalties. Spending HSA funds on qualified medical expenses can help you save hundreds of dollars over the life of your HSA.
To learn more about qualified medical expenses, please visit HealthEquity.com/QME.
1Investments are subject to risk, including the possible loss of the principal invested and may not be eligible for federal depository insurance by the FDIC or NCUA or guaranteed by HealthEquity. Investing may not be suitable for everyone and before making any investments, review the fund’s prospectus.
2HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state’s specific rules.
3It is the members’ responsibility to ensure eligibility requirements as well as if they are eligible for the expenses submitted.
4After age 65, if you withdraw funds for any purpose other than qualified medical expenses, you will be subject to income taxes. Funds withdrawn for qualified medical expenses will remain tax-free.
Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.