HSA Distributions Help
HSA assets are payable on demand. There are no restrictions on when and how often an HSA owner may take distributions from an HSA. Using checks and debit cards are acceptable means of withdrawing HSA assets from the account.
Federal withholding does not apply to HSA distributions.
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.
Qualified medical expenses are expenses incurred after an HSA has been established, are not covered by insurance, and are paid by the HSA owner, his or her spouse, or dependents. Types of qualified medical expenses include
- diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function on the body;
- transportation for the essential medical care listed above;
- qualified long-term care services;
- premiums for qualified long-term care insurance, COBRA health care continuation coverage, health care coverage while an individual is receiving unemployment compensation; for individuals over age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance; and
- certain amounts paid for lodging while away from home that is essential to medical care.
The tax treatment of an HSA after the death of the HSA owner depends on whether a spouse or non-spouse is designated as the death beneficiary of the account.
Spouse as death beneficiary: If the death beneficiary is a spouse, the HSA is treated as the surviving spouse’s own HSA. Distributions to the surviving spouse for qualified medical expenses would be exempt from federal income tax and penalties.
Non-spouse as death beneficiary: If the death beneficiary is a non-spouse, the HSA ceases to be an HSA as of the date of death, and the non-spouse death beneficiary includes the fair market value of the HSA in his or her income for the year of the death.
NOTE: The amount that must be included in the death beneficiary’s income (unless the death beneficiary is the decedent’s estate) is reduced by any payments made by the HSA for the decedent’s qualified medical expenses, if paid within one year after death.