Example: Jamie’s health insurance covers the cost of a flu shot provided the insured gets the shot and submits a receipt. Jamie goes to the doctor for the flu shot and uses his HSA to pay for the shot (a flu shot is a qualified medical expense).
Jamie then submits the same receipt for reimbursement from his insurance company. If the insurance company pays for the expense, Jamie’s use of his HSA to pay for the expense is inappropriate and he will have to return the funds to his HSA as the return of a mistaken distribution or face taxes and penalties.
10. Are there eligibility requirements to open an HSA?
Yes. To be eligible for an HSA, individuals must meet the following requirements:
• Be covered by a High Deductible Health Plan (HDHP);
• NOT be covered by another health plan that is not an HDHP;
• Not be eligible to be claimed as a dependent on another person’s tax return; and
• Not be entitled to Medicare benefits (enrolled in Medicare).
9. What is the HSA eligibility rule regarding not being a dependent on someone else’s income tax return? If you are a dependent on someone else’s income tax return, are you eligible for an HSA?
No. This rule serves primarily to prevent children from opening and funding HSAs. The rule does create some interesting scenarios for adult children.
8. Is a spouse a tax dependent?
No. A spouse is not considered a dependent for HSA purposes.
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7. Whose medical expenses are qualified for tax-free HSA distributions?
HSA owners can use funds in their HSA to pay for the qualified medical expenses of themselves, their spouse and their dependents.
6. What are the different types of HSA distributions and how are they treated for tax purposes?
HSA rules provide for a variety of types of distributions with different tax treatment depending on why the distribution occurred:
Tax consequences & HSA distribution reasons:
Tax-free and penalty-free:
- Qualified medical expenses
- Long-term care insurance
- COBRA health insurance premiums
- Health insurance premiums while receiving unemployment compensation
- Health insurance premiums after age 65
- Medicare premiums for individuals enrolled in Medicare (but no Medigap)
- Rollovers and transfers to new HSA
Tax consequences & HSA distribution reasons:
Taxable but no penalty:
- Made after age 65
- Death distributions
- Disability distributions
- Taxable and Penalized
Other distributions are taxable and subject to a 20% penalty.
5. Do HSAs follow the same rules as FSAs and HRAs as to what is a qualified medical expense?
Generally, yes. The same IRS guidance on qualified medical expense (IRS Publication 502) applies to HSAs, FSAs and HRAs with some key differences:
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• Insurance premiums: HSAs allow for the purchase of insurance premiums in some cases in a manner different than FSAs and HRAs.
• Death distributions: HSA assets pass to named beneficiaries in the case of death of the HSA owner with a special rule that spouses can treat it as their own.
• Timing of distributions: HSAs are more flexible on the timing of distributions.
• Distributions for general expenses: HSAs can be used for nonqualified medical expenses if the HSA owner is willing to pay taxes and penalties.
• Age 65 distributions: At age 65, HSA owners can use the HSA for any reason penalty-free.
• Rollovers/transfers: HSAs allow for an HSA owner to move the funds to a new custodian at the HSA owner’s discretion.
4. Is medical marijuana qualified with a prescription?
No. Marijuana is a banned substance under federal law. Even if the taxpayer lives in a state that has legalized marijuana and the taxpayer has a valid prescription, the HSA owner cannot use the HSA to pay for the marijuana.
3. Do HSA owners have to save receipts for medical expenses paid with the HSA?
Yes, the individual who establishes the HSA is required to maintain a record of the expenses sufficient to demonstrate that the distributions were for qualified medical expenses.
2. Do HSA owners send copies of medical receipts to the IRS or employers?
No. HSA owners should save their medical receipts with their tax information in case of an IRS audit or information request.
HSA owners do not need to send them to the IRS, unless specifically requested by the IRS as part of an audit or other request. HSA owners are also not required to send copies to an employer.
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1. Can an HSA owner use an HSA to pay for a qualified medical expense that insurance also covered?
No. HSA owners cannot use an HSA to pay for qualified medical expenses that were paid for through insurance or other tax-deferred plans. Here's an example:
Example: Jamie’s health insurance covers the cost of a flu shot provided the insured gets the shot and submits a receipt. Jamie goes to the doctor for the flu shot and uses his HSA to pay for the shot (a flu shot is a qualified medical expense).
Jamie then submits the same receipt for reimbursement from his insurance company. If the insurance company pays for the expense, Jamie’s use of his HSA to pay for the expense is inappropriate and he will have to return the funds to his HSA as the return of a mistaken distribution or face taxes and penalties.
10. Are there eligibility requirements to open an HSA?
Yes. To be eligible for an HSA, individuals must meet the following requirements:
• Be covered by a High Deductible Health Plan (HDHP);
• NOT be covered by another health plan that is not an HDHP;
• Not be eligible to be claimed as a dependent on another person’s tax return; and
• Not be entitled to Medicare benefits (enrolled in Medicare).
9. What is the HSA eligibility rule regarding not being a dependent on someone else’s income tax return? If you are a dependent on someone else’s income tax return, are you eligible for an HSA?
No. This rule serves primarily to prevent children from opening and funding HSAs. The rule does create some interesting scenarios for adult children.
8. Is a spouse a tax dependent?
No. A spouse is not considered a dependent for HSA purposes.
Advertisement
7. Whose medical expenses are qualified for tax-free HSA distributions?
HSA owners can use funds in their HSA to pay for the qualified medical expenses of themselves, their spouse and their dependents.
6. What are the different types of HSA distributions and how are they treated for tax purposes?
HSA rules provide for a variety of types of distributions with different tax treatment depending on why the distribution occurred:
Tax consequences & HSA distribution reasons:
Tax-free and penalty-free:
- Qualified medical expenses
- Long-term care insurance
- COBRA health insurance premiums
- Health insurance premiums while receiving unemployment compensation
- Health insurance premiums after age 65
- Medicare premiums for individuals enrolled in Medicare (but no Medigap)
- Rollovers and transfers to new HSA
Tax consequences & HSA distribution reasons:
Taxable but no penalty:
- Made after age 65
- Death distributions
- Disability distributions
- Taxable and Penalized
Other distributions are taxable and subject to a 20% penalty.
5. Do HSAs follow the same rules as FSAs and HRAs as to what is a qualified medical expense?
Generally, yes. The same IRS guidance on qualified medical expense (IRS Publication 502) applies to HSAs, FSAs and HRAs with some key differences:
Advertisement
• Insurance premiums: HSAs allow for the purchase of insurance premiums in some cases in a manner different than FSAs and HRAs.
• Death distributions: HSA assets pass to named beneficiaries in the case of death of the HSA owner with a special rule that spouses can treat it as their own.
• Timing of distributions: HSAs are more flexible on the timing of distributions.
• Distributions for general expenses: HSAs can be used for nonqualified medical expenses if the HSA owner is willing to pay taxes and penalties.
• Age 65 distributions: At age 65, HSA owners can use the HSA for any reason penalty-free.
• Rollovers/transfers: HSAs allow for an HSA owner to move the funds to a new custodian at the HSA owner’s discretion.
4. Is medical marijuana qualified with a prescription?
No. Marijuana is a banned substance under federal law. Even if the taxpayer lives in a state that has legalized marijuana and the taxpayer has a valid prescription, the HSA owner cannot use the HSA to pay for the marijuana.
3. Do HSA owners have to save receipts for medical expenses paid with the HSA?
Yes, the individual who establishes the HSA is required to maintain a record of the expenses sufficient to demonstrate that the distributions were for qualified medical expenses.
2. Do HSA owners send copies of medical receipts to the IRS or employers?
No. HSA owners should save their medical receipts with their tax information in case of an IRS audit or information request.
HSA owners do not need to send them to the IRS, unless specifically requested by the IRS as part of an audit or other request. HSA owners are also not required to send copies to an employer.
Advertisement
1. Can an HSA owner use an HSA to pay for a qualified medical expense that insurance also covered?
No. HSA owners cannot use an HSA to pay for qualified medical expenses that were paid for through insurance or other tax-deferred plans. Here's an example:
Example: Jamie’s health insurance covers the cost of a flu shot provided the insured gets the shot and submits a receipt. Jamie goes to the doctor for the flu shot and uses his HSA to pay for the shot (a flu shot is a qualified medical expense).
Jamie then submits the same receipt for reimbursement from his insurance company. If the insurance company pays for the expense, Jamie’s use of his HSA to pay for the expense is inappropriate and he will have to return the funds to his HSA as the return of a mistaken distribution or face taxes and penalties.
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