Three things you should know about HSAs - Part 3: Spending your HSA funds Skip to content

Three things you should know about HSAs - Part 3: Spending your HSA funds

Note: This is the last of a 3-part series of blog posts. Previous blog posts in the series discussed contributing to an HSA and growing HSA funds.

In a report last year, the Centers for Medicare and Medicaid Services said "U.S. health care spending increased 4.3% to reach $3.3 trillion, or $10,348 per person in 2016." The report broke the spending down further as follows:

  • Hospital care: "Spending increased 4.7% to $1.1 trillion in 2016."
  • Physician and clinical services: "Spending on physician and clinical services increased 5.4% to $664.9 billion in 2016."
  • Prescription drugs: "an increase of 1.3% to $328.6 billion."

Healthcare spending continues to rise, which is one reason health savings accounts (HSAs) are such a beneficial program to millions of Americans. The money saved in an HSA can be spent tax-free1 on qualified medical expenses now or in the future.

The following are a few things to keep in mind about spending HSA funds:

1. HSA funds don't have to be spent every year.

Unlike flexible spending accounts, the funds in an HSA do not expire at the end of the year - the entire amount rolls over each year. For this reason, HSAs can be used as part of an overall retirement plan. Most people will use their HSA funds at some point to help pay for medical expenses, but there is an option to save those funds for later years.

2. HSAs are used to pay for qualified medical expenses.

HSA funds can be used tax-free1 to pay for qualified medical expenses. This includes not only medical emergencies, but vision, dental and other out of pocket costs that are necessary for healthcare. It's important to use your HSA for qualified medical expenses. Not following this rule will result in the loss of tax benefits that come from having an HSA, and result in tax penalties.

3. In retirement, your HSA spending becomes more flexible.

If HSA funds are used on a non-qualified medical expense, the purchase is subject to tax with an additional 20% penalty.2 Depending on the purchase, that can be a significant amount. The only exception is if the accountholder is age 65 or older. At that time, HSA funds can be used for any purchase and only subject to regular income tax on that amount (with no penalty). Qualified medical expenses are still tax-free.1


Additional tips when spending HSA funds:

HSA accountholder can be reimbursed. If an HSA accountholder pays for qualified medical expenses out-of-pocket, those funds can be reimbursed from the HSA. This reimbursement can happen days, weeks, months or even years after the qualified medical expense was made. It is important to keep the receipts to prove that the payment was indeed for a qualified medical expense in case of an audit.

HSA spending may be subject to IRS audit. Even if HSA funds were used for qualified medical expenses, the IRS may ask for proof that the funds were spent correctly. Because of this, it is a good idea to save receipts and keep careful records of how HSA funds are spent. HealthEquity allows accountholders to easily and efficiently upload receipts to their account using the app or member portal.



HSAs are a beneficial tool that allow accountholders to pay for certain medical expenses tax-free.1 As long as accountholders follow the rules when it comes to spending their HSA funds, they can take advantage of the great tax benefits that come from this savings account.


1HSAs 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.

2It is the member's responsibility to ensure they meet HSA eligibility requirements as well as if they are eligible for the plan and expenses submitted. One should consult a tax advisor as individual factors and situations vary. HealthEquity does not provide legal, tax, financial or medical advice.

Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.

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