How are HSA distributions taxed?

Distributions from HSAs may be exempt from federal income tax and penalties, depending on whether or not the distribution is used to pay for qualified medical expenses.

 

Qualified distributions: Distributions from HSAs for qualified medical expenses of the HSA owner, his or her spouse, or dependents are exempt from federal income tax and penalties.

 

Nonqualified distributions: Distributions that are not used for qualified medical expenses are includable in the individual’s gross income. In addition, nonqualified distributions are subject to a 20 percent additional penalty tax, unless the distribution is made after the HSA owner’s death, disability, or attainment of age 65.

 

NOTE: HSA owners are responsible for making the determination as to whether an HSA distribution is qualified or nonqualified. The HSA owner should maintain records of his or her medical expenses sufficient to show that the distributions have been made exclusively to pay for qualified medical expenses, and are, therefore, excludable from gross income. HSA trustees or custodians, as well as employers who make contributions to an employee’s HSA, are not responsible for determining whether distributions are qualified or nonqualified.