Health savings accounts allow individuals to set aside tax-free dollars to pay for qualified medical expenses. As such, it makes sense to most people that they would lose this tax benefit and pay an additional penalty if they use HSA money for an ineligible expense, similar to the tax and penalty they would pay for an early withdrawal from an IRA or 401(k). The penalty increases from 10 percent to 20 percent beginning with the 2011 tax year and is calculated on IRS form 8889, which HSA account holders are required to complete.
Taxpayers do not actually have to send their receipts to the IRS to prove that the money spent out of their HSA was for qualified expenses – unlike an FSA or HRA, substantiation of claims is not required. Instead, the individual keeps records of his or her medical expenses and self-reports to the IRS whether a penalty applies or not. He will need to produce these records if he is ever audited.
There are a few other instances where an HSA account holder might be required to pay a penalty, and they all have to do with contributing more than the allowed amount to the account.
Continue Reading for Free
Register and gain access to:
- Breaking benefits news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.