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What Is a Qualified Expense From an HSA?

A qualified expense from a health savings account, or HSA, is any expense that would normally be deductible for income tax purposes. Such expenses include routine eye and medical examinations, acupuncture, fees for regular doctor's visits, artificial limbs and many other things. IRS publication 502 describes all of the expenses -- there are scores of them -- that qualify for a deduction.

  1. Significance

    • Health savings accounts are tax-favored accounts under which people sock away pre-tax income for the purpose of paying health care costs. They are associated with high-deductible health insurance plans, under which people pay lower premiums but have higher out-of-pocket expenses. The theory is that people with HSAs will save enough money to pay a high deductible -- sometimes as high as $11,000. Because HSAs come with tax benefits, the IRS restricts how the money can be used.

    Misconceptions

    • According to the IRS, you can only deduct medical expenses that exceed 7.5 percent of your adjusted gross income for income tax purposes. An example, consider a person with adjusted gross income of $40,000; 7.5 percent of $40,000 is $3,000. If that person has $2,500 in medical expenses, they are not deductible for income tax purposes. Those expenses, however, are eligible for payment through a health savings account.

    Considerations

    • In 2009 and 2010, people with HSAs could pay for over-the-counter medication, such as aspirin, with HSA funds. Changes to health care laws in 2010 mean that this expense is not allowed as of 2011. Prescription drugs are still considered qualified expenses.

    Warning

    • According to IRS regulations, HSA funds can only be used for qualified medical expenses. Expenses for other items are considered distributions and are penalized. In 2010, distributions are taxed at a taxpayer's normal rate, plus a 10 percent penalty. Starting in 2011, distributions will be penalized at a taxpayer's normal rate plus 20 percent.

    Size

    • HSAs are a growing feature of U.S. health insurance plans, in part because advocates believe they will force consumers to "price shop" when using health care. According to an annual survey of U.S. health insurance companies, 6.1 million people were covered by HSA/high-deductible plans as of January 2008.

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