HSA Disbursement: Tax Information, Paperwork, Eligible Withdrawals
A HSA withdrawal refers to taking money out of your health savings account. If you utilize this money for approved medical expenses, the withdrawal is tax-exempt, but you must report it to the Internal Revenue Service (IRS). If, however, you use the funds for reasons other than covering eligible medical costs, you may face severe tax implications, as you'll be taxed on the withdrawn amount at your standard income tax rate and could potentially also incur a 20% penalty.
To better understand the regulations surrounding HSA withdrawals and your obligations to the IRS when making such withdrawals, read the following.
What is it?
What is an HSA withdrawal?
An HSA withdrawal involves taking money from your health savings account. This can take various forms, such as a debit card transaction, a check, or a transfer of funds from your HSA to another financial account.
HSA withdrawals fall under two categories:
- Qualified HSA withdrawals: These occur when you use funds from your HSA to pay for eligible medical expenses, either by making a payment directly to a provider via debit card issued by the HSA or by making a payment to a provider with your own funds and submitting receiving for reimbursement from your HSA.
- Non-qualified HSA withdrawals: These involve withdrawals used for purposes other than paying for eligible medical expenses. Such withdrawals will be taxed as ordinary income and, if you are below 65 years old, you will normally have to pay an additional 20% penalty to the IRS.
HSA withdrawal form
HSA withdrawal form for 2024
Whenever you withdraw funds from your HSA for any reason, the HSA trustee or custodian is required to submit an IRS Form 1099-SA. Regardless of whether the funds from your HSA are sent directly to you or an eligible medical provider after you receive medical services, the trustee or custodian is obligated to complete this form.
The trustee or custodian will provide a copy of IRS Form 1099-SA to both you and the IRS. To comply with your tax obligations, you will then need to utilize the information provided on IRS Form 1099-SA to complete IRS Form 8889. This form must be included with your 1040 tax return if you have an HSA.
Form 8889 enables you to inform the IRS of your HSA contributions and withdrawals, as well as help calculate whether any portion of your distribution is taxable and/or subject to the 20% penalty for non-qualified distributions.
Qualified HSA withdrawals
Qualified HSA withdrawals
Qualified HSA withdrawals are those made for eligible medical expenses and, consequently, are not subject to either income tax at your ordinary rate or a 20% penalty for non-qualified distributions.
Eligible medical expenses generally include those that would generally be considered tax-deductible if the threshold for deducting medical expenses is met. IRS Publication 502 contains a detailed list of medical expenses that can be paid with HSA funds to ensure the distribution is considered qualified. These include prescription drugs, most types of dental care, chiropractic care, acupuncture, fertility treatments, eyeglasses and contact lenses, service animals, and more.
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HSA distributions and taxes
HSAs are a highly valuable kind of investment account, as you can make contributions with pre-tax funds, allow your money to grow tax-free, and make tax-free withdrawals for medical expenses. Most other tax-advantaged accounts, such as IRAs and 401(k)s, allow either pre-tax contributions or tax-free withdrawals -- not both, as the HSA does.
Although a qualified HSA withdrawal is not taxable, you are still required to complete IRS Form 8889 to report any distributions made throughout the year.
However, if you have made non-qualified distributions due to withdrawing money from your HSA that was not used to pay for eligible medical services, you will be taxed on the withdrawal at your standard income tax rate. If you are under 65 years old, you will also be subject to a 20% penalty on the withdrawn funds.
Those who are 65 or older may make non-qualified distributions without incurring the extra penalty and pay only ordinary income tax. In other words, HSA distributions made after age 65 are treated like those made from a 401(k) or traditional IRA. Due to this added flexibility, HSAs are often used as a retirement savings account.
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In the context of HSA withdrawals, non-qualified distributions made before the age of 65 will be taxed at the standard income tax rate and may also incur a 20% penalty. As a retirement savings option, HSAs can be particularly advantageous for individuals aged 65 or older, as non-qualified distributions are only subject to ordinary income tax.
