A key value of HSAs are tax-free saving and tax-free spending. With one big caveat – all HSA spending, must be used for qualified out-of-pocket medical expenses in order for it to be tax free. So what exactly qualifies under IRS guidelines?
Qualified HSA Expenses
Qualified HSA expenses are set and regularly updated by the IRS. You can see the full qualified HSA expense list here. In addition to everyday expenses, some extra HSA expenses are eligible if prescribed by a doctor or with a note of medical necessity. Keep this in mind as you review the list.
Non-Qualified HSA Expense Penalty
What happens if you spend your tax-free HSA money on non-qualified HSA expenses? The long and short of it is, if you are audited by the IRS, you can incur a 20% penalty plus income taxes. Because these expenses are regulated by the IRS, it’s up to you to stay compliant. Not only this year by from the time you opened your HSA.
In order to substantiate a qualified medical expense purchase to the IRS in case of an audit, you will need documentation (a copy of the receipt of expense). At Lively, we give you the ability to store various documents tied to an expense, for all of those just in case situations.
Your 65th Birthday Present
It turns out there is one more exception. As a birthday present from the IRS, you can use your HSA money for anything when you turn 65, not just qualified medical expenses. You just pay ordinary income taxes at that time – no penalty! In that sense, your HSA funds transform after you turn 65 and can be used just like a 401(k) or IRA. Keep this in mind as you balance your HSA spending vs. savings. There is additional tax-savings value once you turn 65!
Do your homework and ensure you HSA spending is IRS complaint. This will ensure you aren’t stuck with an unexpected IRS audit and penalties. It also might help you save money on medical expenses that you didn’t think were eligible. The more you know here, the more opportunities you have to save.
If you need more help with health account decisions, check out our blog. We will make you a healthcare benefits expert in no time, without any extra work or effort on your end.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.