A Health Savings Account (otherwise known as an HSA) is set up with the intention of providing you with assistance in defraying your medical-related costs. The account is held by a trustee and is strictly regulated by the Internal Revenue Service (IRS). There are rules in place regarding spending (termed "distributions" by the IRS) of your HSA account funds.
Qualified Medical Expenses
In general, medical expenses that can be claimed on your federal income tax return are the same as those which will be considered as qualified medical expenses for spending funds in your HSA. J.K. Lasser cites that one difference involves nonprescription medications. These medications are covered for HSA purposes but not for income tax purposes. According to IRS Publication 502 (Medical And Dental Expenses), any spending you make with your HSA funds must be for what the IRS terms "qualified medical expenses." These expenses include costs associated with making alterations to your home to make it handicapped accessible such as wheelchair ramps, door and entrance widening, countertop modifications and electrical outlet alterations. Weight loss programs, smoking cessation and special foods may also qualify as medical expenses under your HSA. Meigs & Meigs states that, for efficient record-keeping purposes, you need to keep proper documentation of any medical expense you pay and are claiming.
Deductible Rule
In order to have your HSA spending qualify, you will need to follow the IRS rule stating that you must first meet your HDHP (High Deductible Health Plan) regulations regarding their deductible amount.
Eligibility Rule
In order to spend your HSA funds, your Health Savings Account must have been set up by an IRS-approved trustee. This trustee can be an insurance company, bank, health plan provider or IRA specialist.
Tax Rule
According to one IRS spending rule, money you receive from your HSA will be tax-free if it is used to pay or "be reimbursed for qualified medical expenses you incur after you establish the HSA."
If you spend any money from your HSA for anything other than qualified medical expenses, you will have to pay income tax on the amount. There also may be an additional 10 percent tax imposed, states IRS Publication 969 (Health Savings Accounts and Other Tax-Favored Health Plans).
Method of Payment
According to the IRS, there are rules defining how you can spend your HSA funds. You can use cash, credit card and/or debit cards while paying for your qualified medical expenses. Amounts withdrawn from your HSA can be made by either you or your designated beneficiaries.
Reporting Rule
The IRS has a rule that states any amount you spend of your HSA funds needs to be properly documented by your account trustee. Any spending, or distribution, that you incur needs to be reported to the IRS on Form 1099-SA, Distributions From an HSA. This document will be submitted by your account trustee to the IRS. You will receive the appropriate copy of it for your records.
References
- J.K. Lasser's Your Income Tax 2009; Barbara Weltman; 2008
- IRS: Publication 502
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