Are High-Deductible HSA Accounts Taxable?

Health savings accounts (HSA) are designed to work in conjunction with a high-deductible health plan, allowing you to save money for health-related expenses. When used for health-related expenses, the funds in your HSA can be withdrawn on a tax-free basis. There are instances where the funds would become taxable, according to the Internal Revenue Service.

Non-Qualified Expenses

• Although the list of qualified medical expenses is somewhat broad for an HSA, if you use funds for an expense that isn't qualified, this distribution would be considered a taxable distribution. In addition to the distribution being treated as income, you will also have to pay a 10 percent penalty tax on this amount. The 10 percent penalty is waived if you take a distribution after you become disabled, reach age 65 or pass away.

Deemed Distributions

• The Internal Revenue Service specifies that if you participate in any prohibited transactions as outlined in section 4975 with your HSA that those transactions will be taxable events. Some examples of prohibited transactions are selling, leasing or exchanging property between you and the HSA; lending money between you and the HSA; or furnishing goods, services or facilities between you and the HSA. Deemed distributions are also subject to a 10 percent penalty tax.

Death of the HSA Holder

• If the owner of an HSA passes away, the account will still be treated as an HSA if the beneficiary is the spouse of the HSA owner, and no taxes will be owed. If the beneficiary is not the spouse of the HSA owner, the account will cease to be an HSA, and the fair market value of the account will be considered income to the beneficiary.

Excess Long Term Care Insurance Premium

• Each year, the Internal Revenue Service determines how much long term care insurance premium is deductible. This deductible amount can be paid from your HSA without tax consequences. Any amount in excess of this could be considered taxable income.