HSA Distribution FAQ’s
Q. What can HSA funds be used for? A. Funds can be withdrawn for any purpose. However, if not withdrawn for qualified medical expenses by someone under age 65, the amount withdrawn is taxable and subject to a 10% penalty by the IRS. After age 65, there is no penalty for non-qualified withdrawals but amounts are taxable at ordinary income rates. Funds used to pay for the following are tax-free and penalty-free:
- Qualified medical expenses as defined under Section 213 of the IRS Code
- COBRA insurance
- Health insurance premiums for individuals receiving unemployment compensation
- Qualified long term care insurance and expenses
- Medicare and retiree health insurance premiums, but not Medicare supplement premiums
Q. Are health insurance premiums considered qualified medical expenses? A. The following types of insurance premiums count as qualified medical expenses under an HSA:
- COBRA health care continuation coverage
- Health care coverage while an individual is receiving unemployment compensation
- Medicare and retiree health insurance (but not Medicare Supplement plans)*
- Qualified long term care insurance
* Exceptions to this rule are possible. See your financial professional for assistance.
Q. Are HSA withdrawals monitored to make sure they are for qualified medical expenses? A. No, the account holder is responsible for determining if withdrawals are for qualified medical expenses. If the IRS questions any withdrawals, it is the sole responsibility of the insured to prove those expenditures were for qualified medical expenses.
Q. How are disbursements from an HSA taxed? A. HSA disbursements used to pay for qualified medical expenses of the account holder (or spouse/dependents) are not taxed. Any amount of the disbursements not used to pay for qualified medical expenses is subject to ordinary tax plus an additional 10% penalty. This penalty does not apply in the case of distributions made after the account holder’s death, disability, or attaining age 65.
Q. How are disbursements taxed if the account holder is no longer eligible for an HSA? A. If the account holder is no longer eligible for an HSA (e.g., he/she is over age 65 and entitled to Medicare benefits, or no longer has a high deductible health plan), distributions used to pay for qualified medical expenses are still tax-free. If distributions are used to pay for items other than qualified medical expenses, then they are taxed as ordinary income (and subject to the 10% penalty).
Q. Can medical expenses incurred before the HSA was established be paid from the HSA? A. Individuals who established an HSA on or before April 15, can use the HSA to reimburse qualified medical expenses incurred on or after the later of: 1) January 1 of the previous year; or 2) the first day of the first month that they are covered under an HDHP. For HSAs established after April 15, medical expenses may not be paid from an HSA if the expenses were incurred before the HDHP was established.
Q. How can account holders access their HSA funds? A. Institutions often provide check books and/or debit cards that are valid (for medical expenses) where major credit cards are accepted. Cash withdrawals (ATM’s, etc., are not generally permitted). If the IRS questions any withdrawals, it is the responsibility of the insured to prove those expenditures were for qualified medical expenses. It is strongly recommended that all HSA account holders keep receipts and accurate transaction records.
Q. Do HSA account holders receive statements? A. Yes, monthly statements including contributions and disbursements are sent to the account holders. Statements also include debit card transactions with purchase amount and place of purchase. Check with your HSA institution for statement policies.
Q. Can HSA funds be invested? A. Yes. Many HSA accounts offer investment options for account holders that maintain minimum balances. Instruments are mostly money market funds and nationally-recognized mutual funds. Check with your HSA institution for details.
Q. Do HSA funds earn interest? A. With some HSA accounts, the HSA earns interest on minimum balances. Interest rates and minimum balance requirements are subject to policies at your HSA institution.
Q. Can the interest earned on the HSA funds be used to pay for qualified medical expenses? A. Yes, both the HSA contributions and the interest earned may be used to pay for qualified medical expenses tax-free.
Q. If an employee changes from single to family coverage or vice versa, or has another life event change, how is the HSA affected? A. If the HSA plan is affected by a change in policy status, the HSA should be updated to reflect a new maximum allowable contribution amount. Check with your HSA institution to insure that changes to your HSA account are timely.
Q. What are the income tax consequences after the HSA account holder’s death? A. Upon death, any balance remaining in the HSA becomes the property of a beneficiary named in the HSA paperwork. If the beneficiary is the surviving spouse, distributions not used for qualified medical expenses are subject to ordinary income tax. If the beneficiary is a person other than the surviving spouse, the HSA ceases to be an HSA as of the date of the account holder’s death, and the beneficiary is required to include in gross income the fair market value of the HSA assets as of the date of death. This amount is reduced by any payments from the HSA made for the account holder’s qualified medical expenses, if paid within one year after death.