You are responsible for keeping records to prove eligibility for your contributions and withdrawals for eligible medical expenses. If your tax return is audited, you might be asked to provide documentation to show that you used your HSA to pay for eligible medical expenses. You should receive tax forms showing total annual contributions as well as total withdrawals from your HSA:
Form 1099-SA notifies the IRS of withdrawals made from your HSA during the tax year.
Form 5498-SA notifies the IRS of contributions made to your HSA during the tax year.
How do I report HSA withdrawals that are used for non-eligible expenses?
You must report withdrawals for non-eligible expenses on your tax return. Consult your tax advisor for details.
Can I use the money in my HSA for anything other than eligible medical expenses?
Yes, but you might not want to. You can withdraw money from your HSA for any purpose. However, if it’s not an eligible expense, you will pay income tax on the amount withdrawn, plus a 20 percent penalty. Depending on your tax bracket, you could lose 50 percent on the value of money withdrawn. (The 20 percent penalty does not apply in the event of death, disability or once you reach age 65, but you still pay tax.)
Do I have to pay for eligible expenses using my HSA?
No. You choose how to use the money in your HSA. You could pay the expense out of pocket with after-tax dollars and leave the money in your HSA to continue growing tax-free for future use.
What if I have a medical expense that is more than the money in my HSA?
If you don’t have enough money in your HSA to pay for an expense, you can pay for the medical expense out of your own pocket. Once you have enough in your HSA, you can reimburse yourself. If you use your payment card for an amount that is more than the balance in your HSA, the transaction will not go through. If you write a check from your HSA checkbook for an amount exceeding your balance, the check will be returned to you, and you will incur an insufficient funds charge. So keep track of your balance.
What if I have a big medical expense early in the year that exceeds my HSA balance?
If this happens, you could:
Pay the provider out of pocket and reimburse yourself over time as your payroll deductions (or after-tax contributions if you are a retiree) are deposited into your HSA. You could reimburse yourself by using your HSA checkbook, or go online and transfer funds from your HSA to your bank account.
Access other savings or short-term investments you have.
Increase your annual election up to the IRS limit if you have not already done so.
Remember: One of the main purposes of an HSA is to provide long-term savings that grow. Having a tax-protected “nest egg” at retirement to pay medical expenses and Medicare premiums adds a level of financial security for your retirement years.
Can I invest my HSA funds?
Yes. Once you’ve saved enough in your HSA to cover current qualified medical expenses, you can invest any additional contributions for your future, including retirement. You can invest your HSA dollars now, as there is no account minimum requirement before you can invest.
What are the tax advantages of my HSA contributions?
Eligible contributions to the HSA are not subject to federal income taxes. Eligible contributions also are not taxed by most states. Any earnings on your HSA are also not subject to federal income taxes or most state income taxes. Money withdrawn to pay eligible expenses is not subject to federal income taxes or most state income taxes.
Once your account is open, a deposit has been made to your account and funds are available, you can start using your HSA. You control the money once it’s in your account. You must have enough money in your account to cover any withdrawals you make.