What Can I Use My HSA For?

A health savings account (HSA) is like a personal savings account but the money is earmarked for qualified medical expenses. These accounts are funded by employees who decide how much of their pre-tax earnings to contribute. Pre-tax means you don’t pay income tax on the money put into these accounts.

“What can I use my HSA for?” is a frequently asked question from employees with this benefit. The Internal Revenue Service determines qualified healthcare expenses, including prescriptions, medical supplies, and physician visits. This article will provide details about HSAs and the variety of medical services and products they cover.

Who can get an HSA?

HSAs are an effective way to save money to help offset healthcare expenses, but they are not available to everyone. They are limited to those enrolled in a qualifying high deductible health plan (HDHP).

To qualify as an HDHP, the health insurance plan must have a high deductible that can change yearly. While the monthly premiums are lower than other insurance plans, employees pay more out-of-pocket costs before the insurance company pays. Plans in the insurance marketplace that meet this standard have an HSA-eligible label.

HSA vs. FSA

An HSA and a flexible spending account (FSA) both help pay for qualified medical expenses. They have several differences.

HSAs are managed by employees, while FSAs are managed and owned by employers. HSAs have a higher contribution limit than FSAs. For HSAs, unused funds roll over to the next year. All FSA funds must be used during the year or they will be lost.

An HSA is more like a savings account. The FSA is similar to a line of credit. An FSA is a practical choice for short-term needs. The HSA is a long-term investment plan.

What are qualified medical expenses?

The federal government dictates and updates the health care expenses that can be paid with HSA funds. This could include any legal medical service that a physician, dentist, or healthcare practitioner provides that isn’t covered fully by a health insurance provider, including Medicare. It’s used to pay deductibles, copay, and coinsurance fees.

The U.S. Department of Health & Human Services defines qualified medical care expenses as any medical expense that someone might otherwise deduct on a federal income tax form. The following are some commonly covered expenses:

• Doctor visits.
• Lab tests.
• Hospital stays.
• Dental expenses and vision care.
• Birth control treatment.
• Medical transportation expenses, such as ambulance services.

More specifically, HSA funds might cover acupuncture, contact lens solution, smoking-cessation programs, breast pumps, and the adoption of service animals. There are caveats throughout the list of eligible products and services as some are only covered with a prescription.

What isn’t a qualified medical expense?

The list of unqualified expenses includes things such as cosmetic surgery, maternity clothes, and childcare for healthy children.

Another item that you can’t use your HSA for is health insurance premiums. The exceptions to this rule are:

• Medicare.
• COBRA.
• Long-term care insurance.

These are subject to annually adjusted limits, however. There are limits on how much of the HSA money can go for these payments.

Prescription and over-the-counter medications

In March 2020, Congress added over-the-counter drugs (OTC) to the list of qualified medical expenses for HSAs. These include common OTCs such as pain relievers, cold and flu remedies, antacids, and menstrual products.

HSA funds can go toward things to keep children safe, too. For example, sunscreen or lead-based paint removal.

You can also use HSA funds for things like braces or adaptive devices such as hearing aids or eyeglasses. There are a few limitations, so it is always wise to check with a pharmacist or healthcare provider first.

Also on the list of eligible expenses is prescription medication. You can use HSA to pay the full cost of the medication, deductibles, copays, and coinsurance fees.

Non-medical expenses

The funds in an HSA can be used for general non-medical purposes, without penalty, once the employee reaches age 65. However, any withdrawn funds used for non-medical purposes are still subject to income tax.

If HSA funds are withdrawn for non-medical use before age 65, some penalties apply. Funds withdrawn early lose their tax-exempt status and are subject to income taxes. Also, there is an additional 20% tax penalty for early non-medical withdrawals.

In other words, you lose the tax benefits of any funds withdrawn from an HSA for non-medical expenses. There may also be a significant tax fee or penalty.

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