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HSA Account Withdrawals

If you have a high-deductible health insurance plan that meets Internal Revenue Service guidelines, you can open a health savings account (HSA) to save money on a tax-deductible basis to pay for qualified health-related expenses. Unlike a flexible spending account, the funds in your HSA can roll over from year to year. When you have an HSA, it is important to keep detailed and accurate records of the withdrawals you make from your HSA.

  1. Permitted Expenses

    • Funds in your HSA can be used for health-related expenses without paying taxes on the withdrawals. While they can be used for typical expenses like office visits and prescriptions, the funds can also be used for alternative therapies like acupuncture and premiums for long-term care insurance. The IRS reviews and revises this list periodically, and it is best to check with your insurance carrier before making the withdrawal to verify that it is a qualified expense. The IRS also publishes a list of expenses that are not qualified, like health club memberships, bottled water and vitamin supplements that are not prescribed.

    Record-Keeping

    • With an HSA, it is your responsibility to keep records of and document the expenses that are paid out of your HSA. If the Internal Revenue Service questions whether or not the expenses from your HSA were qualified, you will need to produce receipts to validate the expenses. If you don't have the documentation to prove that the expenses were qualified, the IRS can assess taxes and penalties on that amount.

    Penalties for Non-Qualified Withdrawals

    • If the IRS determines that there were non-qualified withdrawals taken from your HSA, that amount will be added to your taxable income for that year. Not only will you have to pay income tax on the withdrawn amount, but there will also be a 10 percent excise tax added to the non-qualified amount. If you are close to the next income tax bracket, the additional income attributed to non-qualified withdrawals can move you to the next tax bracket and have significant financial consequences.

    Suggestions

    • Since HSA-related expenses don't expire, keep your receipts and HSA bank statements indefinitely. You may consider scanning thermal receipts, since they can fade over time. Like any other audit, keeping careful and detailed records can help you substantiate your claim if the IRS decides to audit your HSA withdrawals.

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