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.

Complete your profile to continue reading and get FREE access to, part of your ALM digital membership.

Your access to unlimited content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Critical information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and events.
  • Access to other award-winning ALM websites including and

Already have an account?


BenefitsPro Broker ExpoEvent

BenefitsPro Broker Expo will help attendees prepare for new issues, embrace new challenges and find new solutions.

Get More Information


Join BenefitsPRO

Don’t miss crucial news and insights you need to navigate the shifting employee benefits industry. Join now!

  • Unlimited access to - your roadmap to thriving in a disrupted environment
  • Access to other award-winning ALM websites including and
  • Exclusive discounts on and ALM events.

Already have an account? Sign In Now
Join BenefitsPRO

Copyright © 2023 ALM Global, LLC. All Rights Reserved.