Health Savings Account (HSA) – Withdrawals and Spending Rules
February 25, 2022
A health savings account (HSA) is a trust or account used to pay medical expenses that a high deductible health plan (HDHP) does not pay. HSAs offer triple tax advantages to account owners, including tax exemptions for contributions, earnings and distributions. To obtain the last exemption, HSA holders must follow strict rules for spending HSA funds.
HSA funds may be used on a tax-free basis if they are used to pay for qualified medical expenses that were incurred after the HSA was established. Individuals do not need to meet the eligibility criteria for making HSA contributions in order to receive a tax-free withdrawal from their HSAs.
Employers that offer HSA programs generally have very little, if any, involvement in HSA distributions. HSA owners have sole discretion for how and when to use HSA funds, and an HSA custodian or trustee tracks and reports all HSA activity.
UPDATE: Effective Jan. 1, 2020, over-the-counter (OTC) medicines and drugs and menstrual care products are qualified medical expenses that may be paid for by an HSA on a tax-free basis.
- 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 in order to take a tax-free withdrawal.
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.
- Effective Jan, 1, 2020, OTC medicines and drugs and menstrual care products are qualified medical expenses.
Links and Resources
- IRS Publication 969, Health Savings Accounts and Other Tax-favored Health Plans
- Internal Revenue Code Section 223 (federal tax law for HSAs)
- IRS Notice 2004-50 (IRS guidance on a wide variety of HSA compliance issues)
For a more detailed copy of this HSA Compliance Overview, click here: HSA Withdrawal and Spending Rules .
For clarity & assistance with finding out how setting up an HSA plan will benefit you and your employees, reach out to Mike Young at MY-Employee Benefits Plus at mike@my-EBP.com or 714.716.4060.