The Basics - Qualifying Plans - HSA Contributions - HSA Investments - HSA Distributions

Q: How do I set up my Health Savings Account?

HSA Distributions:

- For what purpose can HSA funds be used?
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The funds belong to you.  Funds can be withdrawn for any purpose, at any time.  However, if funds are withdrawn for reasons other than to pay for qualified medical expenses by someone under age 65, the amount withdrawn is taxable and subject to a 10 percent penalty by the IRS.  After age 65, there is no penalty for non-qualified withdrawals but amounts are taxable.

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 (See IRS Publication 502: Medical and Dental Expenses).  This is the same code section that governs medical savings accounts.
  • COBRA insurance
  • Qualified long-term care insurance and expenses
  • Health insurance premiums for individuals receiving unemployment compensation
  • Medicare and retiree health insurance premiums, but not Medicare supplement premiums
  • Funds may be used for eligible expenses for your spouse or dependents, even if they are not covered by the HDHP.

See Qualified Expenses for a more complete list.

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- Can I use my HSA to pay for medical expenses incurred before I set up my account?
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No.  You cannot reimburse medical expenses you incurred prior to establishing your account.   We recommend you establish your account as soon as possible once you obtain qualifying health insurance coverage.

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- Can I pay for my health insurance premiums from my HSA?
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You can only use your HSA funds to pay health insurance premiums if you are collecting federal or state unemployment benefits, or if you have COBRA continuation coverage through a former employer.

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- What tax return information will I get from my HSA administrator?
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Each January you should receive form 1099-SA, which will indicate the total distributions you took from your account during the previous year, and form 1099-INT, indicating your earnings on the account during the year.

Distributions are not taxed if you spent the money on qualified medical expenses.  Growth on the account is not taxed unless there is distribution of this money for non-qualified purposes.

In May you should receive form 5498, which will indicate your total contributions to the account during the previous year.  This form is not sent out until May because you have until April 15 to fund your account from the previous year.

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- Does the HSA administrator approve medical expenses, or keep track of them?
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No. It is your responsibility to keep track of your own qualified medical expenses. Individual contributions and taxable distributions should be reported on form 1040.

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- Do I have to reimburse myself from my HSA within a certain time period of incurring the medical expense?
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No.  There is no time limit for when you can reimburse yourself for your health care expenses.  You should keep legible receipts of your medical expenses, as well as records of when you do reimburse yourself.

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- What happens if I withdraw money from my HSA to pay a medical bill, but then later I am reimbursed by my insurance company for that medical expense?
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That is what is referred to as an erroneous distribution.  The account holder can repay the erroneous distribution by April 15 of the following year with no penalty if there is reasonable evidence that the original distribution was made in good faith and that it was a qualified medical expense. The repayment is classified as an adjusted entry, not a contribution; therefore it would not count twice toward the yearly maximum.

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- What happens at age 65?
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When you turn 65 you become eligible for Medicare.  If you enroll in Medicare, you are no longer eligible for coverage under a high-deductible health plan. You may still use tax-free HSA funds to pay qualified medical expenses, Medicare Part D premiums, and retiree health insurance premiums.

At this point you are also entitled to take out any amount from your account for any reason, penalty-free (although you must pay income taxes on the withdrawals at that time).  There are no requirements laid out in the law at the present time indicating when you must start taking distributions.  However, we would expect the IRS to treat this like an IRA.  If that is the case, then you must start taking distributions from your account at age 70 and a half.

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- What happens to my HSA if I die?
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Your HSA will be treated as your surviving spouse’s HSA, but only if your spouse is the named beneficiary.  If there is no surviving spouse or your spouse is not the beneficiary, then the savings account will cease to be an HSA and will be included in the federal gross income of your estate or named beneficiary.

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- What happens if I become disabled?
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If you become permanently disabled, you may withdraw your funds at any time, without penalty.  Withdrawals will be subject to income tax at that time.

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- What happens to my HSA if I cancel my HDHP coverage?
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Once funds are deposited into the HSA, the account can be used to pay for qualified medical expenses tax-free, even if you no longer have HDHP coverage.  The funds in your account roll over automatically each year and remain indefinitely until used.  There is no time limit on using the funds.

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- Can I use HSA money to pay for Medicare expenses?
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Yes, you can use HSA distributions to pay for Medicare Parts A and B, Medicare Advantage, and Part D prescription drugs, as well as out-of-pocket expenses and employment-based retirement health benefit premiums.  For quotes and information about Medicare supplement and Medicare Advantage plans, see our Medicare supplement page.

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- How does health care reform (Obamacare) affect the way I use my HSA?
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The Affordable Care Act does include HSA-qualified health plans. You can also apply for a premium tax credit subsidy to help with your premium costs if you qualify. In fact, by funding your HSA, you reduce your taxable income to enhance your eligibility for subsidies or cost-sharing reductions in premiums.

Health Care Reform pages for many more details.

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