Health Savings Accounts(HSAs) are a wonderful way to pay for your health care expenses.  Not only do they save you money, they have the potential to make you money.  They also have the benefit of  driving down health care costs for everyone.   However nothing is simple in America anymore.  Your HSA comes with a long list of rules concerning when and how it can be used.  This site summarizes those rules, and points you towards additional resources.

Qualified Expenses

First and foremost, the IRS says you can only use your HSA to pay for “qualified medical expenses”.  The IRS doesn’t go by a set list of medical goods and services which qualify, rather they use a general definition of: diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.   There is no hard and fast rule as to what meets that definition.   But by looking at what is acceptable and what is not acceptable can give you a good feel.

So what are some examples?

Medical Costs That Can Be Paid For From An HSA

  • Hospital bills in general – expect for elective cosmetic surgery
  • Dentistry exams and treatment
  • Eye exams and treatment, contacts, glasses, laser eye surgery, etc.
  • Prescription drugs
  • Hearing Aids
  • Wheel chairs, crutches and home improvement costs related to disability
  • Acupuncture
  • Chiropractic Care
  • Treatment/Counseling for drug and alcohol abuse
  • Insulin and diabetic testing devices
  • Ambulance Service
  • Birth control pills
  • Vasectomy
  • Psychologist or Psychiatric visits
  • Fertility treatment
  • Maternity, prenatal, delivery, well baby costs
  • Transportation for medical care
  • Nursing home

What Can Not Be Paid With a HSA

  • Vitamins or supplements
  • Hair removal or hair transplants
  • Cosmetic surgery
  • Funeral expenses
  • Gym memberships
  • Teeth whitening
  • Veterinary costs
  • Over the counter medications

So in general, qualified expenses are those that relate directly to an actual medical condition.   This covers the testing, treatment or prevention of that medical condition or disease.   The latter category is where most of the grey areas lie.   A vasectomy is considered prevention of a medical condition, however a multivitamin is not.   Going to a psychologist is covered,  but a vacation is not, even if recommended by your doctor for your mental and physical well being.   In general that which promotes good health is not covered, that which restores good health is.

Keep in mind the government does change what qualifies.  For example, over the counter medications used to be eligible.  But the healthcare reform bill changed that, unless you have a prescription from a doctor.  So while you were able to use your HSA to pay for cough medicine, you are no longer able to do so.

If you are found to have paid for something that does not count as a qualified expense, you will have to pay income tax on the expenditure.  An additional 20% penalty will be applied as well.  This 20% penalty is waived for those over 65.

Remember to save all receipts or bills in case you get audited by the IRS so you can prove your HSA was used for qualified medical costs.

Contribution limits

The government puts an annual limit on just how much money you can shelter from taxes in an HSA.

For 2012 an individual can contribute $3,100, a family $6250.

In 2013 those limits will increase to $3250 for an individual, $6450 for a family.

Those 55 and older will be able to make an additional ‘catch-up’ contribution of $1,000 a year in both 2012 and 2013.