Health savings accounts, or HSAs, are extremely powerful tools that help even middle-class Americans save thousands of dollars every year compared to traditional health insurance approaches.
When combined with a high-deductible health plan (HDHP), HSAs provide the following benefits:
- Immediate, up front savings, thanks to the lower premiums of HDHPs compared to traditional insurance.
- Immediate tax savings. Contributions to HSAs are made with pre-tax dollars, even if your employer, not you, is contributing to your HSA. You save on both income and payroll taxes when you make pre-tax contributions to your HSA.
- Tax-free growth of funds in the HSA, provided you use them for qualified medical expenses
- More freedom to choose your doctor. You may be restricted to an HMO or PPO’s care network when it comes to care paid for by your health insurance company. But with HSAs, you have complete freedom to choose your own providers.
- More income available for retirement. Any money you don’t need for medical expenses continues to grow, tax-deferred. Once you turn 65, you can use your accumulated HSA contributions and growth to supplement your retirement savings – or for any other purpose you like! It’s taxed similarly to a traditional IRA in retirement.
In this blog post, we’ll discuss what constitutes a qualified medical expense for HSA purposes, and how you can get the most value out of your health savings accounts.
HSA Qualified Expenses
The IRS outlines which medical expenses it considers to be an HSA qualified expense in IRS publication 502: Medical and Dental Expenses.
This list is quite extensive and includes expenses such as health plan deductibles, coinsurance, copays and prescription costs.
Those are important. But they’re only the beginning. There are actually hundreds of common medical expenses that qualify for tax-free HSA withdrawals – allowing you to save hundreds and even thousands on out-of-pocket medical costs and taxes.
The Pre-Tax Advantage: Why HSAs Save Money on Taxes and Medical Costs
With most personal expenses, you have to pay for everything with after-tax dollars.
That is, for every dollar you earn, your employer withholds about 20 to 25% of it. And then they withhold an additional 15.2% in Social Security and Medicare Taxes. And a bit more in unemployment taxes.
Even if you’re self-employed or an independent contractor or business owner, you need to be setting that money aside yourself to pay your quarterly or annual income taxes.
So when you pay with after-tax dollars, you’re already about 25% to 35% in the hole. You may only get to spend 65 to 75 cents on the dollar, after you take out taxes.
But thanks to the health savings account, you can now pay qualified medical expenses using much more valuable pre-tax dollars, rather than after-tax dollars.
Individual circumstances vary. But by routing your qualified medical expenses through an HSA, you can realize savings between 20% to 40% on eligible medical expenses.
This estimate takes into account the federal income tax savings, as well as potential state and local tax savings, if applicable.
Here’s how it works: suppose you’re in a 25% federal tax bracket, and contribute $2,000 to an HSA. By using your HSA rather than your checking or savings account to pay for medical care, you would save up to $500 in federal taxes alone.
Additionally, most states offer tax deductions or credits for contributions to HSAs providing additional savings.
Of course, everyone’s tax situation is unique, and the actual savings can vary based on factors such as income level, tax deductions, tax credits, and specific tax laws in your jurisdiction.
How Do HSAs Work?
A health savings account (HSA) is a tax-exempt account used solely for the purpose of paying for qualified medical expenses with pre-tax dollars.
If the treatment or service is medically necessary according to IRS Publication 502, you can contribute pre-tax money to your HSA each year, and then use that money tax-free to pay for qualified medical expenses.
The health savings account is an amazingly powerful tool in the U.S. tax code that has helped millions of Americans save money on taxes, reduce their health care expenditures, and take more direct and personal control of their healthcare and that of their family members.
Here’s how they work:
- HSA contributions are pre-tax. You pay no taxes on money you contribute to your HSA. You also pay no taxes on money your employer contributes to your HSA.
- Growth of your HSA assets is tax-deferred. You pay no taxes on growth, income, interest, or capital gains. Your money compounds unmolested by taxes as long as it remains in your HSA.
- Tax-free withdrawals for medical costs. Any money you need to withdraw for qualified medical expenses is tax-free.
- Retirement kicker. Any money you don’t need for medical expenses when you reach age 65 is available to supplement your retirement income. The 20% penalty that normally applies to HSA withdrawals for non-qualified medical expenses goes away. You just need to pay income taxes on the amount you withdraw, just like a traditional IRA or 401(k).
- You have the option to “self-direct” HSA investments. That is, you can keep your HSA in a conservative, money market style account, which is normally the default.
Or you can use an HSA third-party administrator to invest your HSA money into stocks, bonds, mutual funds, and even real estate, if you believe you can get a better return there.
Meanwhile, you can take money out of your HSA at any time, penalty free, to pay for any qualified medical expense specified in IRS Publication 502.
“By routing your qualified medical expenses through an HSA, you could save 20% to 40% on taxes and medical bills.”
Can I use a healthsharing program with my HSA?
Yes.
If the healthsharing plan is structured correctly.
There is currently one healthsharing plan available nationwide that is specifically designed to maintain your eligibility to make pre-tax contributions to your health savings account: HSA SECURE.
This excellent healthsharing plan combines the best of both worlds: it includes the ten minimum essential coverages required for it to qualify as a high deductible health plan.
At the same time, like most healthsharing plans, HSA SECURE costs just a fraction of what a full-fledged health insurance plan premium costs.
If you don’t qualify for a subsidy under the Affordable Care Act, the cost savings typically amount to thousands of dollars per year for a family of four.
However, the HSA SECURE Plan is only available to those who own a business or who have some self-employment income.
Is an HSA Plan right for you? Take this quiz!
Or better yet, contact an HSA For America Personal Benefits Manager for a free personalized analysis, recommendation, and quote.
Learn More About How You Can Save Money By Switching to Healthsharing
What Can I Use My HSA For?
Here is a list of common HSA eligible expenses our clients use their HSAs to pay with nearly every day:
- Health insurance deductibles
- Health insurance copays
- Health insurance co-insurance (e.g., your 20% responsibility in an ‘80-20’ health insurance plan
- Alternative therapies
- Prescription weight loss medication costs
- Counseling and therapy
- Dietitian fees
- CBD and hemp oil, if used to treat a specific medical condition. Purely recreational use is not eligible.
- Nutritional supplements (only if a doctor determines they are medically necessary for treatment of a specific medical condition
- Special Equipment and home modification. HSA funds can be used for capital expenses for some home modifications for disabled or handicapped individuals including ramps, widening doors and modifying kitchen structures for easier accessibility.
- Massage therapy
- Massage chairs
- Maternity expenses not covered by a health insurance policy
- Chiropractic care
- Diabetic testing supplies and kits
- Mental healthcare related to your obesity
- Travel/transportation costs to receive medical care
- Lodging for yourself and one other person to assist you
In most cases, you should ask your doctor to provide a Letter of Medical Necessity for these and other qualified medical expenses.
That way, you’ll have your bases covered in case the IRS challenges your expense as not being medically necessary, and therefore not being a qualified medical expense.
If the IRS audits you, having a Letter of Medical Necessity in your folder may preserve the favorable tax treatment of that transaction, and help you avoid paying needless taxes and penalties.
HSA-Qualified Dental Expenses
Dental fees are often the most expensive item that people forget to pay for from their HSA.
From cleanings, to crowns, to dentures, all of your medically necessary dental work is eligible to be paid from your HSA.
Cosmetic teeth whitening procedures are typically not eligible. But most other dental procedures count as qualified medical expenses.
What’s more, you can save 20% to 40% by using your HSA to pay for them tax-free, or to reimburse yourself for the expense after the fact.
HSA-Qualified Vision Expenses
- Eye exams (including refraction fees)
- Prescription eyeglasses
- Prescription sunglasses
- Contact lenses and lens solutions
- Eye drops and artificial tears
- Prescription safety glasses
- Eye surgery, such as LASIK or PRK (including associated pre- and post-operative care)
- Eye patches or eye occlusion devices for medical purposes
- Eye-related diagnostic tests, such as visual field tests or optical coherence tomography (OCT)
- Corrective eye surgery, such as cataract removal or corneal transplants
- Orthokeratology (ortho-k) lenses
- Treatment for eye conditions or diseases, such as glaucoma, macular degeneration, or diabetic retinopathy
- Vision therapy for diagnosed medical conditions
- Low vision aids, such as magnifiers or specialized lenses
- Occupational-specific eyewear, such as safety goggles or specialized lenses for specific work environments
Note: While the above expenses are generally eligible, there may be specific limitations or requirements for reimbursement. Always review the specific guidelines provided by your HSA administrator and consult with your eye care professional for personalized advice and to ensure the expenses meet the necessary criteria for HSA reimbursement.
Long-Term Care Premiums
Medicare does not cover long-term care expenses.
Therefore I typically recommend a good long-term care insurance plan. HSA dollars can be used to pay for a portion of these premiums based on your age as seen here.
Remember that unlike traditional health insurance, long-term care insurance companies practice medical underwriting.
That means you can be charged a higher premium or denied coverage outright if you are in poor health or have pre-existing conditions.
Long-term care insurance also gets more expensive as you get older. I recommend purchasing a long term care policy with a premium you can afford as soon as possible, before your health changes for the worse.
Which as we all know, can happen at any time.
HSAs and Medicare
HSA dollars can be used to reimburse you for any premiums you pay for Medicare Part A, Part B and Part D prescription coverage.
However, you cannot use your HSA dollars to pay for Medigap premiums.
Note: Once you enroll in Medicare, you can’t make any more contributions to your HSA.
You can, however, still let your HSA money in your account grow tax-free. You can still use it to pay for qualified medical expenses, tax-free and penalty free.
Furthermore, the 20% penalty on withdrawals for non-qualified medical expenses no longer applies once you turn 65. At that point,the penalty vanishes. You just pay ordinary income taxes on any money you withdraw for non-qualified medical expenses.
Mental Health Care
Mental health is an important component of your overall well-being. Costs related to counseling, therapy, medications, outpatient treatment and hospitalization for mental health conditions are qualified medical expenses.
Generally, the expense must be directly related to treating a specific diagnosed mental health condition such as psychosis, schizophrenia, depression, anxiety, post-traumatic stress disorder, and many others.
Alcohol and Addictions Treatment
Alcoholism and drug addiction are serious medical conditions. The IRS recognizes the cost drug and alcohol treatment programs as qualified medical expenses for HSA purposes.
You should get a letter of medical necessity from a physician so you’ll have some backup in case of an audit.
Physical therapy
These costs could include hydrotherapy, chiropractor services, or medical massage therapy necessary to treat a diagnosed medical condition.
Special fees incurred by handicapped individuals
These fees and expenses may include wheelchair purchase or rental, telephone or TV equipment to assist the hard-of-hearing, the cost and care of guide dogs, modifications to vehicles to make them driveable, or special school costs for the handicapped.
Note: These expenses must be primarily for the prevention, diagnosis, or treatment of a specific medical condition. Expenses for general health and wellness purposes for healthy individuals won’t qualify as medical expenses and would not be deductible.
HSA-Eligible Over-the-Counter Items
Here is a brief list of non-prescription, over-the-counter items eligible for HSAs.
- Acne treatments and cleansers
- Allergy and sinus medications
- Antacids and acid reducers
- Bandages and adhesive strips
- Birth control products (condoms, spermicides)
- Cold and flu medications
- Contact lens solution and supplies
- Cough drops and cough syrups
- Diabetic supplies (blood glucose monitors, test strips, lancets)
- First aid kits and supplies
- Heat and cold packs
- Insect repellents and bug bite treatments
- Pain relievers (acetaminophen, ibuprofen, naproxen)
- Reading glasses and magnifying lenses
- Smoking cessation aids (nicotine gum, patches)
- Sunscreen (SPF 15 or higher)
- Wound care ointments and creams
- Feminine hygiene products (pads, tampons)
- Medical support braces and wraps
- Digestive health products (antidiarrheals, laxatives)
Note: This list is not exhaustive, and there may be other OTC items that qualify as eligible expenses. Always refer to the specific guidelines provided by your HSA administrator and review the IRS Publication 502 for the most accurate and up-to-date information on eligible OTC items.
How Much Can You Save With HSA For America?
Here’s a scenario we find quite typical for a family of four when we help them switch from a high-premium, high-tax conventional insurance approach to a healthsharing approach coupled with a health savings account.
| Typical Non-HSA Plan $7500 Deductible 80% /20% Coinsurance | HSA Plan melded with a Health Sharing Program *, $1000 IUA (initial unshared amount) | |
|---|---|---|
| Annual Premium | - $16,812 | - $7,860 |
| Insured's Share of Medical Costs ($2,000 claim) | - $2,000 (full amount) | - $1,000 (rest paid by healthshare) |
| Non-covered expenses | - $550 | - $550 (dental and eyewear expenses) |
| Expenses Subtotal | - $19,362 | - $9,410 |
| Federal Tax Savings* | + $0 | + $1,752 |
| State Tax Savings | + $0 | + $365 |
| Net Expenses (out-of-pocket minus savings) | - $19,362 | - $7,322 |
| Total (Net saving with HSA Plan) | + $12,040 in Savings! |
Compare Pricing on the Best HSA Plans Available
Every family is different. But when we crunch the numbers, we are almost always able to show savings in the thousands of dollars per year. Especially in states that have an income tax, which just adds to the tax savings of an HSA-based strategy.
Am I Eligible for an HSA?
To contribute pre-tax to a health savings account, you must be enrolled in a high-deductible health plan (HDHP).
As of 2023, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,500 for an individual or $3,000 for a family.
An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $7,500 for an individual or $15,000 for a family. (This limit doesn’t apply to out-of-network services.).
Learn More About HSAs
How to Maximize the Value of Your HSA Account
Documentation and Records
It’s crucial to maintain proper records and documentation of your medical expenses.
This includes a letter of medical necessity from your physician.
You should also keep receipts, invoices, statements, and any other relevant documents that support your deduction. You don’t need to submit these records with your tax return, but you should retain them in case of an audit.
If you use an HSA, your HSA custodian should provide you with a debit card. Pay all of your your out-of-pocket medical expenses with your HSA debit card. You can then track your expenses using their website or mobile app.
Each year, your HSA custodian will provide you with a tax document that you can attach to your income tax return documenting your expenses paid using the HSA.
Note: Be sure to use your HSA account only for qualified medical expenses. Otherwise the money you spend will be subject to income taxes, as well as a severe 20% penalty if you’re under age 65.
Get a personalized health insurance analysis and review
What Medical Expenses Don’t Qualify as Medical Expenses?
General wellness expenditures
In general, you can’t use your HSA to pay for medical expenses that aren’t for the specific purpose of treating a specific medically diagnosed condition.
Expenditures just for maintaining general fitness or wellness don’t qualify. They have to be directly related to treating a specific and defined medical diagnosis in your file.
Speak with your doctor about getting a letter of medical necessity to support any deduction or planned HSA or FSA expenditure.
Gym, spa, and fitness club memberships
Gym membership costs do not qualify as a §213(d) medical expense.
They are not generally deductible as a medical expense, even with a letter of medical necessity. However, using an HSA, FSA, or the medical expense deduction for other medical expenses, can offset the cost of your fitness club membership or even home fitness equipment, making it much more affordable.
Similarly, because gym memberships don’t qualify as a §213(d) medical expense,, any employer payment for or reimbursement of a gym membership fee is counted as taxable income to employees, and subject to withholding and payroll tax requirements.
The cost of diet foods and/or beverages (i.e. diet soda, fiber bars, etc.)
In most cases, these are personal expenses, not medical expenses, and not generally deductible or allowable for HSAs and FSAs as qualified medical expenses.
You can only deduct the cost of special foods as a medical expense if all of the following criteria apply:
- The food does not satisfy normal nutritional needs,
- The food treats a diagnosed illness or mitigates its symptoms, and
- A physician determines that this special food is medically necessary.
So take advantage of that HSA or FSA if you can. And if you want to look at another HSA-qualified health insurance option to see if you can save some money, contact one of our highly trained Personal Benefits Managers today.
We’ll help you analyze your options. And we’ll do it for free.
Other Expenses that generally do NOT qualify for tax-free HSA withdrawals
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- Cosmetic surgeries or procedures performed solely for cosmetic purposes, such as facelifts, breast augmentation, or liposuction.
- Teeth whitening or dental veneers for cosmetic purposes
- Hair transplant or hair restoration procedures (Exception: Alopecia areata treatments or treatments for hair loss as a result of chemotherapy, with a letter of medical necessity from a physician).
- Over-the-counter general health items, such as vitamins, supplements, and herbal remedies not prescribed by a healthcare professional
- Non-prescription weight loss products or meal replacement shakes
- Health club or gym membership fees
- Marijuana, even if prescribed by a physician
- Non-prescription nicotine gum or patches
- Non-prescription sunscreen or tanning lotions
- Cosmetic contact lenses or non-prescription eyewear
- Funeral or burial expenses
- Maternity clothes or baby-related items
- Non-prescription foot care items, such as arch supports or shoe inserts
- Insurance premiums (except for specific cases like long-term care insurance or COBRA continuation coverage)
- Health-related educational courses or seminars, unless prescribed to treat a specific medical condition
- Non-prescription personal care items, such as toiletries, bath products, or beauty supplies.
These examples are general guidelines, and there may be certain exceptions or specific circumstances where some of these expenses could be considered eligible.
Additional Resources
IRS Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
Frequently Asked Questions About HSAs and Medical Expenses:
Q: What is a Health Savings Account (HSA)?
A: An HSA is a tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP).
By contributing to an HSA, you can shield part of your income from income taxes and possibly payroll taxes. You can also effectively pay for qualified medical expenses pre-tax dollars – potentially saving thousands.
Q: Who is eligible to open an HSA?
A: To be eligible for an HSA, you must be enrolled in an HDHP, not be claimed as a dependent on someone else’s tax return, and not have any other non-HDHP health coverage (with some exceptions).
Q: What are the tax advantages of an HSA?
A: HSAs offer triple tax benefits. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
Additionally, any money in the account you don’t need for medical expenses becomes available to supplement retirement income once you turn age 65.
You get the benefit of tax deferral as long as you leave the money in the account. If you do need to withdraw funds after age 65, the 20% penalty for non-qualified withdrawals goes away. You just pay income taxes on the amount you withdraw, just as you would with a traditional IRA or 401(k) retirement account.
Q: What are qualified medical expenses?
A: Qualified medical expenses are eligible for tax-free withdrawals from an HSA.
These include costs for diagnosis, treatment, prevention, and mitigation of physical or mental health conditions.
Q: Can I use my HSA to pay for health insurance premiums?
A: In general, HSA funds cannot be used to pay for health insurance premiums, except for certain exceptions such as COBRA continuation coverage, long-term care insurance premiums, or health coverage while receiving federal or state unemployment benefits.
However, the cost of health insurance is already tax deductible for most individuals and families, So there is no tax advantage to using an HSA to pay for health insurance premiums.
Q: Can I use my HSA to pay for over-the-counter (OTC) medications?
A: Under the CARES Act passed in 2020, HSA funds can be used to purchase OTC medications without a prescription, including pain relievers, allergy medication, and cold remedies.
Q: Are cosmetic procedures considered qualified medical expenses?
A: Cosmetic procedures are generally not considered qualified medical expenses unless they are necessary for the treatment of a specific medical condition or to restore the normal function of a body part.
Q: Can I use my HSA to pay for alternative therapies like acupuncture or chiropractic treatments?
A: Alternative therapies such as acupuncture, chiropractic treatments, or naturopathic care may qualify as eligible medical expenses if prescribed by a healthcare professional to treat a specific medical condition.
Q: Can I use my HSA to pay for non-prescription vitamins and supplements?
A: Non-prescription vitamins and supplements are generally not considered qualified medical expenses unless they are specifically recommended by a healthcare professional to treat a diagnosed medical condition.
Q: Can I use HSA funds to pay for dental and vision expenses?
A: Yes, HSA funds can be used to pay for dental and vision expenses, including dental treatments, eye exams, eyeglasses, contact lenses, and prescription sunglasses.
Q: Can I reimburse myself from my HSA for medical expenses incurred in previous years?
A: Yes, as long as you had an HSA at the time the expenses were incurred, you can reimburse yourself from your HSA for qualified medical expenses incurred in previous years.
Q: Can I contribute to an HSA if I have other health coverage?
A: Generally, if you have any non-HDHP health coverage, such as a general-purpose Flexible Spending Account (FSA), VA coverage, or Medicare, you are not eligible to contribute to an HSA. However, there are exceptions like limited-purpose FSAs and certain types of coverage.
You can also make expenditures from your HSA at any time, even if you currently have non-HDHP coverage.
Q: Are premiums for long-term care insurance considered qualified medical expenses?
A: Premiums paid for qualified long-term care insurance policies are considered qualified medical expenses and can be paid for with HSA funds, subject to specific limits based on age.
Q: Can I use my HSA to pay for transportation costs to medical appointments?
A: Transportation costs, including mileage, parking fees, and tolls incurred for medical care, can be paid for with HSA funds.
The standard mileage rate for medical miles or actual costs can be used for calculation.
Click here for an in-depth guide on using your HSA to pay for medical-related transportation costs.
Q: What happens to unused HSA funds at the end of the year?
A: Unlike Flexible Spending Accounts (FSAs), HSA funds roll over from year to year. There is no “use it or lose it” rule, allowing you to accumulate funds and use them for qualified medical expenses in future years.
Q: Can I invest HSA funds?
A: Yes, many HSA providers offer self-directed investment options.
Once your HSA balance reaches a certain threshold, you can invest the excess funds in stocks, bonds, mutual funds, or other investment vehicles, potentially allowing your HSA to grow over time.
You should understand that investment involves risk. You could potentially lose some or all of what you invest within a self-directed HSA.
Q: Can I make catch-up contributions to my HSA?
A: Yes, individuals aged 55 or older can make catch-up contributions to their HSA, allowing them to contribute an additional amount above the regular annual contribution limit.
Q: Can I use HSA funds to pay for medical expenses incurred by my spouse or dependents?
A: Yes, HSA funds can be used to pay for qualified medical expenses incurred by your spouse and dependents, even if they are not covered by your HDHP.
Q: Can I have an HSA and a Healthcare Flexible Spending Account (FSA) simultaneously?
A: In general, you cannot have both an HSA and a general-purpose Healthcare FSA simultaneously.
However, you can have a limited-purpose FSA, which can be used for eligible dental and vision expenses only.
Q: Can I contribute to an HSA if I am enrolled in Medicare?
A: Once you enroll in Medicare, you are no longer eligible to contribute to an HSA. However, you can still use the funds in your existing HSA for qualified medical expenses tax-free.
Q: Can I use my HSA or FSA to pay for a gym membership?
A: Under current IRS regulations, gym memberships are generally not considered eligible expenses for HSAs or FSAs.
However, some employers may offer wellness programs that provide a separate reimbursement for gym memberships. This reimbursement would generally be taxable as income.
Check with your employer or HSA/FSA administrator for specific guidelines.
Q: Can I use my HSA to purchase dietetic foods or meal replacement products?
A: In general, the cost of dietetic foods or meal replacement products is not eligible for reimbursement from HSAs or FSAs, as they are considered personal expenses for general health or well-being.
However, certain dietetic foods might be eligible if prescribed by a healthcare professional to treat a specific medical condition, such as diabetes or a diagnosed metabolic disorder.
Q: Can I use an HSA to pay for supplements or over-the-counter weight loss products?
A: Normally no. However, certain products might be eligible if prescribed by a healthcare professional to treat a specific medical condition.
Expenditures for supplements don’t qualify if they’re taken only for general wellness purposes.
Q: What documents should I keep as proof for HSA medical expenses?
A: It’s important to maintain proper documentation of any medical expenses you incur during the year..
Keep records such as itemized bills, receipts, invoices, statements, and prescriptions that clearly show the nature of the expense, the date, and the amount paid. Also, retain any documentation from healthcare professionals prescribing or recommending your treatment or expenditures.
Q: Are there any state-specific tax considerations related to HSAs and medical expenses?
A: State tax laws may vary, and some states conform to federal tax laws while others have different rules regarding medical expense deductions.
California does not allow a state tax deduction for contributions to an HSA.
Disclaimer
HSA For America does not provide tax advice. This information is for general informational purposes only and should not be construed to be tax advice. For information specific to your situation, you should consult with a tax professional familiar with the tax laws in your specific state.
Wiley is President of HSA for America. He believes that consumers should have choice and price transparency, so they can make the best healthcare decisions for their needs. Read more about Wiley on his Bio page.
