Health savings plans (HSAs) are excellent accounts for those who want to take advantage of tax-exemptions for contributions and distributions, as well as for the income the account grows. You must ensure funds withdrawn are only used to pay for qualified medical expenses. Otherwise, you’ll not only pay income tax on these distributions, but a 20 percent penalty, as well. Which leads to an important question, “What are qualified medical expenses for health savings accounts?”
Let’s start with what’s not allowed.
Expenses that are not classified as qualified by the IRS:
- Non-necessary cosmetic surgery
- Hair transplants, electrolysis and hair removal procedures
- Nutritional supplements and weight loss programs
- Membership costs of health clubs
- Teeth-whitening products and toiletries (such as toothpaste, etc.)
The above are simply a few examples, but you can rest assured that the full list of non-qualified expenses includes things like vacations, maternity clothes, or funeral expenses. If you are ever in doubt as what constitutes an allowed or disallowed expense, consult with a professional to make sure. You always want to maintain compliance with the IRS.
Qualified expenses for health savings accounts include:
- Visits to the doctor and routine physicals
- Tests such as labs, X-rays, MRIs, and additional diagnostic/treatment services
- Medically necessary cosmetic surgery
- Insulin and prescription drugs (including over the counter drugs prescribed by a doctor)
- Glasses, contact lenses, and laser eye surgery
- Hearing aids, crutches, wheelchairs
- Dental care (X-rays, extractions, orthodontics, and dentures)
- Smoking cessation programs
- Special equipment needed for health care, including car controls for handicapped persons, and guide dogs
- Transport to/from health care facilities and doctor appointments, etc., including ambulance services
HSA Connect provides a comprehensive list, or you can contact a professional for guidance. You don’t want to run the risk of pulling funds for things deemed as not qualified expenses for health savings accounts and face tax liability with the penalty.
Additional provisions for qualified health care expenses you may not be aware of:
While the average person cannot use HSA funds to be reimbursed for health care premiums, the rule changes if you are 65 and over. When you reach this age, health insurance premiums fall under qualified expenses for health savings accounts, with the exception of Medicare supplement policies.
Others can be reimbursed within compliance for COBRA, long-term care, and premiums incurred when you’re receiving unemployment compensation.
Have questions? Contact Midland to discuss qualified expenses for health savings accounts in detail. We oversee self-directed HSAs for our clients and are available to review the pros-and-cons with you to help determine if opening an HSA is the right move for you.