Medical Expenses That Can and Can't Be Covered by an HSA
By Agatha Schmidt, CISP, SDIP, CHSP
Some HSA owners may not fully understand what medically-related expenses their HSA is allowed to cover. Although financial organizations are not responsible for determining whether a medical expense is a qualified expense, it is helpful to know some of the basics. Here are some common questions HSA owners have asked their financial organization.
What medical expenses does my HSA cover?
To be considered a qualified medical expense (QME), the expense must be incurred after the HSA is established and must qualify for the medical and dental expense tax deduction. IRS Publication 502, Medical and Dental Expenses, contains an inexhaustive list of such expenses, including the cost of doctors’ fees, prescriptions, and certain dental and vision care. Generally, any cost related to the prevention, diagnosis, mitigation, and treatment of disease that affects any structure or function of the body is considered a QME. This includes transportation costs and certain amounts paid for lodging while away from home that are essential to medical care.
The CARES Act of 2020 allows the cost of over-the-counter (OTC) medications and menstrual care products to be considered QMEs; it repealed the restrictions imposed by the Affordable Care Act that required OTC drugs or medications to be prescribed to be considered QMEs.
The cost of health care coverage by individuals receiving unemployment compensation can be covered by an HSA, as well as payments for qualified long-term care services and long-term care insurance. Individuals age 65 and older may also treat premiums for Medicare Parts A, B, or D, Medicare HMO, and premiums paid by employees for employer-sponsored health insurance as QMEs.
Whose qualified medical expenses can be covered by my HSA?
A common misconception is that individuals must be covered by a high deductible health plan (HDHP) in order for their QMEs to be covered by an HSA. That is not the case: individuals who are no longer eligible to contribute to an HSA may continue to receive distributions from their HSA to pay or reimburse their QMEs. Additionally, an individual who is a spouse or dependent of an HSA owner may have her QMEs covered by her spouse’s or parent’s HSA. For more information, see the section titled Distributions from an HSA in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
What are some examples of nonqualified medical expenses?
Medical expenses incurred before the HSA was established are not considered QMEs. Personal use items—such as toothbrushes and toothpaste, as well as nutritional supplements—such as vitamins and herbal supplements, cannot be covered by an HSA unless the supplements are recommended by a medical practitioner as treatment for a diagnosed medical condition. Cosmetic surgery (unless it corrects a deformity directly related to a disease), gym memberships (unless they are prescribed to treat a structure or function of the body or a specific disease), and dancing or swimming lessons are not considered QMEs. IRS Publication 502 contains a list of other nonqualified expenses.
If an individual uses his HSA to cover nonqualified expenses, the amount distributed from the HSA is subject to income tax and a 20 percent penalty tax (unless a penalty-tax exception applies).
What if I used my HSA to pay for an expense that I mistakenly thought was qualified? Can I reimburse my HSA for that expense?
If an individual uses an HSA to pay an ineligible expense (e.g., concert tickets), the only recourse is to roll over the assets to an HSA within 60 days of receiving the distribution. HSA owners may make only one rollover contribution during a 12-month period. The distribution is reported on Form 1099-SA and the rollover contribution is reported on Form 5498-SA. This is different from a “mistaken distribution”. A mistaken distribution occurs when a distribution was taken for what the HSA owner mistakenly believed was a “true” eligible expense; however, the distribution amount exceeded the actual cost of the QME. Or perhaps the amount was later covered by insurance. An HSA owner may correct the mistake by returning the distributed funds to the HSA by April 15 following the first year that she knew or should have known that the distribution was a mistake. For reporting purposes, this means that the financial organization must adjust the distribution amount to reflect the net distribution taken. The financial organization must also suppress the reporting of the contribution (the return of the funds). Financial organizations are not required to accept a return of mistaken distributions, however there is guidance in IRS Notice 2004-50 for financial organizations who do choose to accept these transactions.
