HSA funds can pay for any “qualified medical expense”, even if the expense is not covered by your HDHP. For example, most health insurance
does not cover the cost of over-the-counter medicines, but HSAs can. If the money from the HSA is used for qualified medical expenses,
then the money spent is tax-free.
Unfortunately, we cannot provide a definitive list of "qualified medical expenses". A partial list is provided in IRS Pub 502
(available at www.irs.gov). There have been thousands of cases involving the many nuances of what constitutes "medical care" for
purposes of section 213(d) of the Internal Revenue Code. A determination of whether an expense is for "medical care" is based on all
the relevant facts and circumstances. To be an expense for medical care, the expense has to be primarily for the prevention or alleviation
of a physical or mental defect or illness. The determination often hangs on the word "primarily."
You are responsible for that decision, and therefore should familiarize yourself with what qualified medical expenses are
(as partially defined in IRS Publication 502) and also keep your receipts in case you need to defend your expenditures or
decisions during an audit.
Once funds are deposited into the HSA, the account can be used to pay for qualified medical expenses tax-free, even if you no longer have HDHP coverage. The funds in your account roll over
automatically each year and remain indefinitely until used. There is no time limit on using the funds.
You can continue to use your account tax-free for out-of-pocket health expenses. When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, copays,
and coinsurance under any part of Medicare. If you have retiree health benefits through your former employer, you can also use your account to pay for your share of retiree medical insurance premiums.
The one expense you cannot use your account for is to purchase a Medicare supplemental insurance or "Medigap" policy. Once you turn age 65, you can also use your account to pay for things other than medical expenses.
If used for other expenses, the amount withdrawn will be taxable as income but will not be subject to any other penalties. Individuals under age 65 who use their accounts for non-medical expenses must pay income
tax and a 10% penalty on the amount withdrawn.
If you are still covered by your HDHP and have not met your policy deductible, you will be responsible for 100% of the amount agreed to be paid by your insurance policy to the
physician. Your physician may ask you to pay for the services provided before you leave the office. If your HSA custodian has provided you with a checkbook
or debit card, you can pay your physician directly from the account. If the custodian does not offer these features, you can pay the physician with your own
money and reimburse yourself for the expense from the account after your visit. If your physician does not ask for payment at the time of service, the physician
will probably submit a claim to your insurance company, and the insurance company will apply any discounts based on their contract with the physician. You should
then receive an "Explanation of Benefits" from your insurance plan stating how much the negotiated payment amount is, and that you are responsible for 100% of
this negotiated amount. If you have not already made any payment to the physician for the services provided, the physician may then send you a bill for payment.
What happens depends on how the HSA is designed. If your spouse is designated as the beneficiary by you, your spouse becomes the owner of the HSA when you die.
If you provide that it goes to your estate or other entity, the value of the HSA at death is income to the estate or other entity.