What are the guidelines for using HSA funds tax-free?
Distributions from HSAs are tax-free when used for qualified medical expenses for the individual covered by the HDHP and his/her spouse and dependants. Qualified medical expenses are defined under Section 213(d) of the Internal Revenue Service (IRS) code*. For HSAs qualified medical expenses generally do not include health insurance premiums.
Additionally, HSA funds can be used for the following without federal tax:
| Qualified long-term care insurance, subject to certain dollar limitations|
| COBRA continuation coverage |
| Health plan coverage while an individual is receiving unemployment compensation|
| At age 65 and over, Medicare premium and out-of-pocket expenses or any health insurance premiums (e.g. Medicare HMO and Group Retiree Plans), other than a Medicare supplemental (Medigap) policy|
* Refer to IRS publication 502 for a complete list of Section 213(d) expenses (http://www.irs.gov/pub/irs-pdf/p502.pdf
What happens to unused funds at year-end?
HSA account balances automatically carry over from year to year for use for future medical expenses.
What happens to HSA funds once a person is entitled to Medicare benefits (generally age 65)?
Once a person is entitled to Medicare benefits, future contributions to an HSA must cease, but existing HSA funds can still be used tax-free for qualified medical expenses. However, if the person is eligible for, but does not enroll in Medicare, he or she may continue to make contributions.
What happens if HSA funds are used for something other than qualified medical expenses?
Generally, the amount used for non-qualified expenses is subject to income tax plus a 10 percent additional tax penalty. If the individual is age 65 or older at the time of distribution, the additional penalty does not apply.
Who is responsible for documenting that HSA funds were used for qualified medical expenses?
The HSA account holder is responsible for providing documentation to the IRS to prove that HSA distributions were used for qualified medical expenses to the extent the expense is not covered by insurance or otherwise.
Should the HSA account holder keep receipts of his or her purchases to prove the purchases were qualified medical expenses?
Yes, the account holder should retain receipts of his or her purchases to prove to the IRS that distributions from the HSA were for qualified medical expenses. It is recommended the HSA account holder retain all medical expense receipts and insurance company’s explanation of benefits (EOB) to demonstrate amounts were paid for qualifying medical expenses and not reimbursed.
Are tax-free rollovers from HSAs to IRAs permitted?
Consumers are now able to make a one-time, tax-free trustee-to-trustee transfer from an IRA to an HSA. The individual must remain enrolled until the same date the following year.
The above information does not constitute legal, tax or other benefit plan design advice. Anthem strongly encourages consultation with a tax advisor before establishing a Health Savings Account. Any Health Savings Account will be established between the individual account holder and the HSA custodian or trustee. Anthem is responsible for the administration of the health plan, and the custodian is responsible for the administration of the HSA.