Tax guide

Withdrawing from an HSA

When you sign up for an HSA, you’ll probably receive a debit card – though some HSAs still provide paper checks. And some HSAs allow you to pay bills for doctors, hospitals, and specialists through an online bill paying feature. But paying for non-qualifying expenses with an HSA can mean a penalty.

Let’s look at how to withdraw funds from an HSA.

Withdrawing Funds

Withdrawing funds from your HSA can be as simple as swiping a card. You can use your HSA debit card to pay for medical supplies, doctor co-pays and other medical services.

What happens when I file my taxes? You’ll receive Form 1099-SA showing how much money was distributed in the year from your HSA, whether it was for qualifying expenses or not. Enter the distributions amount on the Health Savings Account screen on your return.

Withdrawing for Non-qualifying Expenses

If you make a non-qualifying withdrawal – meaning you used money for a non-qualifying expense – you’ll get hit with an IRS penalty. The penalty is 20% – a substantial amount.

How’s the penalty assessed? You must self-report any non-qualifying purchases on the Health Savings Account screen. Not claiming the non-qualifying expenses may lead to an audit and more penalties and fines.

How can I prevent avoid a penalty? First, check whether it's actually a qualifying expense. It’s also a good idea to keep receipts (itemized if possible). If you use your HSA to pay for over-the-counter medications, keep a copy of the prescription provided by your doctor. Over-the-counter medications are not normally a qualifying expense, but they are if you have a prescription. Bottom line: if you use your HSA to make a payment or make a purchase, keep the paperwork.

Also see:
HSAs and Your Tax Return
Who's Eligible for an HSA?

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