How do you spend HSA Funds?
HSA money must be used for qualified medical expenses to remain tax-free. You can make tax-free withdrawals from your HSA to pay for these expenses as soon as
- your account is activated, and
- you have an opening balance.
There are two reasons why you would pay for qualifying medical expenses with funds outside the HSA account. The first is because you do not have enough money in the account to pay for the procedure. In that case, you may use other funds and take the deduction later as long as you have supporting documents to show the tax authorities. The second reason is that you prefer to leave the funds in the HSA and continue to earn dividends and profits that are not taxable until you retire or use later for qualifying expenses.
What Can You Use Your HSA For?
You can spend your HSA dollars on medical expenses for yourself, or anyone you claim as a spouse or dependent on your personal income tax — even if that person is not covered by your HDHP. In general, HSA withdrawals for qualifying medical expenses are excluded from your gross income — that is, they are not taxed — even if you’re not currently eligible to contribute to the HSA.
Only distributions provable as qualifying medical expenses will be tax-free. If you pay for procedures that do not qualify, the monies used are considered to be “income” for your tax year and will be subject to both federal and state income taxes, as well as an additional penalty tax of 10% of the amount that was spent.
What’s a Qualifying Medical Expense?
The IRS definition of “qualifying medical expenses” is broad, and you can use your HSA to pay for many things your health insurance won’t cover. However, regulations do change. You can always find the most up-to-date list of qualifying expenses online, in Publication 502 on the IRS website (www.irs.gov) or on this website (HSAfinder.com) under QUALIFYING MEDICAL EXPENSES .
Here’s just a sampling:
- Professional care
- Medical doctors
- Nursing services
- Emergency care
- Christian Science practitioners
- Acupuncturists (but not herbalists)
- Therapists (certain certifications may be required)
- Treatments not often covered by health insurance:
- Alcoholism or drug addiction treatment
- Fertility enhancement
- Laser eye surgery
- Prescribed weight-loss or stop-smoking programs
- Special schools and homes for the mentally retarded
- Medical equipment, appliances and other personal items:
- Artificial limbs and prosthetics
- Dentures and other artificial teeth
- Contact lenses and eyeglasses
- Braille books and magazines
- Crutches and wheelchairs
- Hearing aids
- Guide dogs and other helper animals
- Birth control pills
- Costs that may be incurred when seeking treatment
- Trips and travel exclusively for the purpose of a treatment
- Meals and lodging associated with such trips
- Qualifying treatment-related expenses:
- Telephone or television modifications for disability
- Legal fees related to treatments
- Medical conferences (must be related to a condition)
The law provides that these small items, such as aspirin, sunscreen, vitamins, “aromatherapy” candles, acne creams, Epsom salts and Ace bandages, qualify only if they have been prescribed.
What Does NOT Qualify?
These expenses are just a sampling of expenses you can’t pay for with your HSA. (If you do pay for these with a withdrawal from your HSA, you’ll either have to reimburse the account by April 14 th of the year following the tax year or pay income tax — plus a 10% penalty tax — on the withdrawal amount.)
- Cosmetic surgery (unless the surgery is related to a medical condition, as in the case of a birth defect or a mastectomy)
- Teeth whitening
- Maternity clothes
- Diaper services
- Health club dues
- Electrolysis for hair removal
- Hair transplants
- Household help or babysitting
- Marijuana for glaucoma (or other controlled substances)
- Nonprescription drugs and medicines (over-the-counter drugs can be qualifying expenses, but you must have a doctor’s written recommendation)
- Food supplements not prescribed by a doctor (e.g., Ensure TM.)
- Over-the-counter vitamins or diet drinks (e.g., Slimfast)
- Swimming lessons
- Weight-loss programs not prescribed
- Funeral expenses
Some borderline expenses must wait for further guidance in the form of future IRS notices.