Does an HSA have to be used exclusively for medical expenses

Question

I had an HSA last year. This year I have health insurance through ACA. Does the HSA money have to be used exclusively for medical expenses?

Answer 1

I just want to point out that your question implies a misunderstanding, even though you didn't explicitly mention it:

I had an HSA last year. This year I have health insurance through ACA.

The fact that you have insurance through the ACA may not be relevant. There are many plans in the ACA that are HSA compatible. But even if you don't currently have a compatible HSA plan, that just means you can't contribute any more funds to your HSA account, but you can still spend the funds already in your HSA, and regardless of your insurance plan (or even if you're uninsured) you will almost always have some eligible medical expenses that you could use the funds for.

To answer your specific question, no, you don't have to use the funds for eligible medical expenses, but if you don't you'll have to pay tax + fees on the withdrawals. (Unless you're over 65 in which case you'll pay tax, but no fees.)

Answer 2

If you want the tax benefits of the funds, yes, they must be used for qualified medical expenses as defined by the IRS.

You can withdraw funds whenever you want, for any reason, but if they are not spent on qualified medical expenses, then there will be tax implications. If you are under 65 years old, you will pay income tax plus a penalty on any unqualified expenses. But if you are at least 65, you will pay only income tax, without a penalty.

Answer 3

Yes, it must be for a qualified medical expense.

Qualified medical expenses are those expenses that generally would qualify for the medical and dental expenses deduction. These are explained in Pub. 502, Medical and Dental Expenses.

Also, non-prescription medicines (other than insulin) aren’t considered qualified medical expenses for HSA purposes. A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug:

1. Requires a prescription,
2. Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or
3. Is insulin.

For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses. State law determines when an HSA is established. An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established.

If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses.

Qualified medical expenses are those incurred by the following persons.

1. You and your spouse.
2. All dependents you claim on your tax return.

3. Any person you could have claimed as a dependent on your return except that: a.

   • The person filed a joint return,

   • The person had gross income of $4,150 or more, or

   • You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2018 return.

https://www.irs.gov/publications/p969#en_US_2018_publink1000204083

Answer 4

Contrary to what some of the other answers here have said, it is possible to spend your HSA funds on non-medical expenses without penalty, but only if you hold them until after the retirement age of 65:

There is no penalty for non-health care withdraws in retirement though. "It works just like an IRA once you hit (age) 65," Conroy says. At that point, money can be taken from an HSA for any purpose with only income tax due on that amount. That's the same as how withdrawals from traditional IRAs are handled after age 59 1/2.

If your current healthcare plan is comprehensive, you can just sit on your HSA (or even invest it) until you retire. Then, you can spend it on anything you'd like, without tax penalty.