Answers to Your Questions About HSA Qualified Medical Expenses
By Chad Neumann, CIP, CISP, CHSP
We have a client who has an HSA but her spouse does not. Can she take a distribution from her HSA to pay for medical expenses that her spouse incurred?
Yes. The 2018 IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, clearly states that qualified medical expenses are those incurred by the following persons.
HSA owner and HSA owner’s spouse
All dependents the HSA owner claims on her tax return
Any person the HSA owner could have claimed as a dependent on her federal tax return, except that
the person filed a joint return,
the person had gross income of $4,150 or more, or
the HSA owner, or her spouse if filing jointly, could be claimed as a dependent on someone else’s tax return.
Regardless of whether a spouse is covered under the HSA owner’s health insurance or if he has his own health insurance, an eligible expense incurred by the spouse is a qualified medical expense that the HSA owner can take a distribution from her HSA for, as long as the expense is not covered by an insurance plan.
How do we know whether our HSA owner clients have qualified medical expenses that they are taking distributions from their HSAs for?
It is not a financial organization’s responsibility to track whether the expense is qualified; that is the HSA owner’s responsibility. Your responsibility as the HSA trustee or custodian is to report the distribution to the IRS.
The IRS requires that you report the distribution on IRS Form 1099-SA Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. Enter code 1, Normal distribution, in Box 3. The HSA owner is responsible for determining if the expense is qualified or nonqualified.
The HSA owner may refer to IRS Publication 502, Medical and Dental Expenses, for a list of the expenses that are considered qualified expenses. The HSA owner must file IRS Form 8889, Health Savings Accounts (HSAs), to report to the IRS which distributions are qualified and which distributions are not qualified and subject to income tax and possibly an additional 20 percent penalty tax.
We have a client who changed jobs and no longer has a high deductible health plan. Can he still take a distribution from his HSA to pay for qualified medical expenses?
Yes. Remember that the HSA is a savings account used to pay for the HSA owner’s and HSA owner’s family’s medical expenses. An individual need only be concerned about health insurance coverage when establishing and contributing to the HSA. At that point, the type of health insurance an individual has determines 1) whether he can contribute and 2) how much. Once contributions are in the HSA, that money can be used for any future qualified medical expenses, regardless of the health insurance coverage at that time. That is why some individuals make contributions to their HSAs and then wait to use them in the future when they may have higher medical bills. Even when an individual is on Medicare and, thus, not eligible to contribute to an HSA he may still use the HSA to pay for expenses not covered by Medicare.
We have an HSA owner that used his debit card at the gas station by mistake. I’ve heard of something called a “mistaken distribution” where the owner can just put the money back. Is this one of those times?
Probably not. IRS Notice 2004-50, Q&A 37, defines a “mistake of fact due to reasonable cause” as “the account beneficiary reasonably, but mistakenly, believed that an expense was a qualified medical expense and was reimbursed for that expense from the HSA.” Notice 2004-50 goes on to state that if there is clear and convincing evidence that amounts were distributed from an HSA because of a mistake of fact due to reasonable cause, the account beneficiary may repay the mistaken distribution no later than April 15 following the first year the account beneficiary knew or should have known the distribution was a mistake. Based on that definition, using the debit card at the gas station would not be considered reasonable cause.
When the distribution is considered a mistaken distribution, it is not included in gross income, nor is it subject to the additional 20 percent penalty tax. The repayment also is not subject to the excess contribution penalty tax and should not be treated as a contribution on IRS Form 5498-SA.
Your organization does not have to allow beneficiaries to return mistaken distributions to the HSA. If your organization does allow the return of mistaken distributions, you may rely on the HSA owner’s statement that the distribution was in fact a mistake.
