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9 things you probably didn't know about your health savings account

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As you’re probably aware, a Health Savings Account (HSA) is a tax-favored account used to pay for qualified medical expenses. HSA contributions are tax-deductible, or potentially pre-tax if made by an employer.

It is always used in conjunction with a qualified High-Deductible Health Plan (HDHP). The HSA is a custodial or trust account which must be opened with an IRS-approved custodian or trustee.  From a less technical level, the HSA is a checking, savings or other type of investment account used for medical expenses, just with a lot of additional legal rules and tax benefits. Often, the money is deposited at a bank, credit union or other HSA approved custodian but also can be invested in stocks, bonds, mutual funds and a wide variety of other investment choices.

HSAs are designed to pay for day-to-day medical expenses on a tax-favored basis. HSA owners are given the control to decide what to buy, where to buy it, and how much to pay. HSAs also demand more personal responsibility in that HSA owners need to make these decisions, understand the HSA rules, and maintain receipts and other records to prove to the IRS that they acted within the rules.

For an individual unable to afford traditional insurance, the High Deductible Health Plan (HDHP) and HSA combination may provide an affordable approach to insurance not possible otherwise. Many people that can afford traditional insurance also choose HDHPs and HSAs because the combination reflects a cost savings and provides more “pure insurance” rather than pre-paid medical. These vehicles offer a number of advantages including tax-free distributions, tax-free earnings, tax-deductible individual contributions, pre-tax employer contributions, ability to roll over and transfer balances, and account ownership and control. With the HSA comes some additional responsibilities to manage the account from a budgeting, spending, record-keeping and tax-reporting standpoint. In addition, the owner is charged with knowing or learning some complex rules to avoid tax ramifications and/or penalties.

How the HSA works

HSAs are designed to pay for qualified medical expenses of the HSA owner, the HSA owner’s spouse, and the HSA owner’s tax dependents (generally children) tax-free and penalty-free. These expenses must be “qualified” to get this special treatment and include medical expenses incurred before the insurance deductible is met, co-payments, prescription drugs, dental, vision, and much more.

As stated above, HSA owners enjoy a great deal of control as to how and when HSA funds are spent. HSA owners can use current HSA funds to pay for current medical expenses, save for future medical expenses and even reimburse past medical expenses incurred after the HSA establishment date. The HSA owner, the spouse or dependents do not need to be currently eligible to contribute to an HSA in order to use HSA funds on qualified medical expenses.

Most HSA custodians provide checks, debit cards, online banking or other tools to give HSA owners direct control over their HSA distributions. There is no requirement that HSA custodians or employers check to see if distributions are used for qualified medical expenses. The IRS could possibly ask the HSA owner for proof of a medical expense so individuals need to save medical receipts in their tax files. There are no required mandatory distributions from an HSA although an HSA owner can begin to use the funds for general retirement at age sixty-five without penalty although income taxes apply. There are many special rules, exceptions, and details that make HSA distributions more complicated than this general overview implies, but generally HSAs are used to pay for medical expenses.

Clearly qualified medical expenses are allowed and these include things most people would expect: most normal medical care, co-pays, prescription drugs, dental care, and eye care. Most of these expenses would probably not be a surprise to most people.  However, HSA owners that use an HSA for non-qualified medical expenses will owe taxes and a 20 percent penalty unless another exception applies, so it is always good to be as certain as possible. IRS Publication 502 provides a good definition of a qualified medical expense:

“Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.”

This definition can often lead to questions without certain answers. IRS Publication 502 proceeds to provide a lot of additional detail and examples applying the above definition including the most detailed list from a government source. Although comprehensive, Publication 502’s list is not exhaustive. An extensive list assembled from Publication 502 as well as industry best practices is included in 2015 Health Savings Accounts Facts, by Whitney Richard Johnson, Esq.  Another thing to consider is that some medical expenses that might often be overlooked may well be qualified for some people and not others depending on the facts and circumstances as we shall see in this article below.

9 qualified expenses you might have overlooked

1. Over-the-counter drugs 

Before you get too excited about this one, the Patient Protection and Affordable Care Act eliminated over-the-counter drugs as a qualified medical expense starting in 2011, so generally, they don’t qualify. However, if an HSA owner gets a prescription for an over-the-counter drug, it IS a qualified medical expense. 

As an example: Rita has acid-reflux issues and finds that OTC Nexium works best for her symptoms. The over-the-counter Nexium does not meet the qualified medical expense rules unless Rita gets a prescription for the over-the-counter drug from her doctor. She will not need to actually show the prescription to buy the over-the-counter drug but will need to save it in case of an IRS audit (some medical debit card companies may require an HSA owner to show the prescription at the point of purchase in order to use the HSA debit card to pay for their purchase).

One must remember that the professional that writes a prescription must be authorized by the state to issue prescriptions and the prescription must meet the legal definition of prescription for the state in which the medical expense is incurred. For a doctor or other medical professional to simply “recommend” taking the OTC drug would NOT be sufficient to qualify. 

As an aside, an exception to the general rule that OTC drugs are not eligible is insulin. An HSA owner can purchase insulin without a prescription as an eligible expense.

2. Weight-loss supplements, nutritional supplements and vitamins 

Generally, weight-loss supplements, nutritional supplements, and vitamins are used for general health and are not qualified medical expenses. HSA owners also usually cannot include the cost of diet food or beverages in medical expenses because these substitute for what is normally consumed to satisfy nutritional needs.

However – there can be exceptions to this rule:

  • Food: HSA owners CAN include the cost of special food if: (1) the food does not satisfy normal nutritional needs, (2) the food alleviates or treats an illness, and (3) the need for the food is substantiated by a physician. The substantiation by a physician should include a written prescription or order.
  • Vitamins and supplements: If the nutritional supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a doctor, then they may be qualified. The IRS provides that:
    “You cannot include in medical expenses the cost of nutritional supplements, vitamins, herbal supplements, ‘natural medicines,’ etc. unless they are recommended by a medical practitioner for a specific medical condition diagnosed by a physician. Otherwise, these items are taken to maintain your ordinary good health and are not for medical care.”

This quote is meant as a general prohibition on using your HSA to pay for vitamins and nutritional supplements. The language of “unless they are recommended…” however, creates an opening for HSA use. Given that over-the-counter drugs are not qualified medical expenses without a prescription and that vitamins are likely considered over-the-counter drugs, an HSA owner planning to use his or her HSA to pay for vitamins should get a doctor’s prescription.

3. Over-the-counter non-drug items

Although over-the-counter drugs are generally not qualified medical expenses, over-the-counter items that are not medicines still qualify. Any non-drug over-the-counter items must meet the definition of “medical care”. The definition includes expenses for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body. This may include items such as crutches, bandages, breast pumps and blood pressure monitors. However, expenses for items that are merely beneficial to the general health of an individual, such as a piece of exercise equipment, are not expenses for medical care.

4. General health expenses 

  • Gym and health club memberships: Normally these are not qualified expenses – the IRS specifically provides the following:
    “[y]ou cannot include in medical expenses health club dues or amounts paid to improve one’s general health or to relieve physical or mental discomfort not related to a particular medical condition. You cannot include in medical expenses the cost of membership in any club organized for business, pleasure, recreation, or other social purpose.”
    There is a small opening in this language to interpret that gym memberships are allowed as qualified medical expenses. Qualified medical expenses include items necessary to cure, mitigate, treat or prevent disease and the costs for treatments affecting any part or function of the body. Linking the gym membership to the cure or treatment of a specific ailment or disease rather than general health is the key to wiggling through this narrow interpretation that may allow an HSA owner to use an HSA to pay the fees. Faced with an IRS challenge, an HSA owner will want as much evidence of that link as possible. A clear statement from a doctor that the membership is necessary to treat a specific medical condition is the base of that support. Using a gym connected to a health care institution that is clearly established to address specific health issues rather than serving as a health club for general health would further support the argument that it’s allowed.
    An HSA owner using a gym under the guidance of a medical professional located in a medical facility for the specific purpose of therapy to recover from a specific injury would likely be able to use the HSA to pay for those expenses. The medical provider may bill the patient for the health care, not the gym services, eliminating this issue as the direct health care expense for therapy would be qualified. In fact, even the IRS states that you can include “separate fees” charged at a health club for weight-loss if “it is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease).” Accordingly, separate charges for more specific services may be allowed. Conservatively, and for the vast majority of HSA owners that also belong to health clubs, health club memberships address general health and should not be included in medical distributions from HSAs.
  • Weight-loss programs: HSA owners cannot include payments to lose weight unless the weight-loss is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). If the weight-loss treatment is not for a specific disease diagnosed by a physician, the HSA owner cannot include either the fees paid for membership in a weight reduction group or fees for attendance at period meetings.
  • Family planning: Most family planning classes or other expense are not likely to be qualified – however, there is an exception for HSA owners that are already pregnant as well an exception for most medical expenses related to infertility. Expenses for childbirth classes are reimbursable, but are limited to expenses incurred by the mother-to-be. Expenses incurred by a “coach,” even if that is the father-to-be, are not qualified. To qualify as medical care, the classes must address specific medical issues, such as labor, delivery procedures, breathing techniques and nursing.
  • Stress reduction: While stress reduction items are generally not qualified medical expenses because they are designed to improve general health rather than curing a particular illness or condition. Items that are medically necessary for a particular condition can usually be included, however, such as a massage because of a muscle that atrophied due to an illness or accident would be qualified in contrast to a massage for relaxation that would generally not be qualified even if needed to reduce stress.

5. Travel expenses

The cost of travel can be a qualified medical expense if the transportation and trip are primarily for and essential to medical care. This can include the cost of tickets for bus, taxi, train, plane or ambulance. HSA owners can also include the out-of-pocket costs for car expenses such as gas and oil, parking and tolls. HSA owners cannot include depreciation, insurance, general repair or maintenance. HSA owners not wanting to calculate actual expenses can use a standard mileage rate of 23.5 cents (for 2014).

HSA owners cannot include:

  1. Going to and from work, even if a medical condition requires an unusual means of transportation
  2. Travel for purely personal reasons to another city for an operation or other medical care
  3. Travel that is merely for the general improvement of one’s health
  4. The costs of operating a specially equipped car for other than medical reasons

If an HSA owner is staying at a hospital or similar institution, the HSA owner can include the cost of meals and lodging. If the HSA owner is not staying at a hospital, the HSA owner can include up to $50 for each night for each person for lodging provided the following conditions are met including

  • The lodging is primarily for and essential to medical care
  • The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital
  • The lodging is not lavish or extravagant under the circumstances
  • There is no significant element of personal pleasure, recreation, or vacation in the travel away from home

For example, if a parent is traveling with a sick child, up to $100 per night can be included as qualified medical expenses. An HSA owner cannot include the cost of meals if not staying at a hospital that serves the meals as part of inpatient care. HSA owners cannot include in medical expenses a trip or vacation taken merely for a change of environment, improvement of morale, or general improvement of health, even if the trip is made on the advice of a doctor.

In addition, procedures outside of the United States are qualified if the procedures are otherwise qualified medical expenses and the care is legal both in the foreign country and in the U.S. This allows for HSA owners to save money by having medical procedures performed abroad.

6. Concierge medicine

The IRS does not directly answer whether you can use an HSA to pay for concierge medicine programs (also called “physician retainer programs” and “boutique medicine”). IRS general guidance provides that you can use your HSA to pay for the prevention or alleviation of a physical or mental defect or illness and not for general health. Whether concierge medicine programs provide treatment for medical treatment or general health is heavily dependent on how the program works. Ultimately, the HSA owner will need to decide with the help of their tax adviser.

Some variations on the concierge programs include:

  • Cash for Care Programs. Some of these programs are more designed around the doctor not accepting insurance payments. If these programs simply charge fees assuming cash payment, they work very well for HSA owners. Of course, an HSA owner can use his or her HSA to pay for qualified medical expenses billed by a doctor who does not accept medical insurance.
  • Retainer Fee/Amenities Program. This type of program charges an annual fee for access to a specific physician or physician group. Amenity items could include seeing a physician that has a limited number of patients, getting access twenty-four hours a day/seven days a week to that physician, and same-day or quick appointments.  When you actually see the physician you or your medical insurance are still charged separately for that visit. These amenities are not likely to be considered qualified medical expenses as they relate to access not treatment. There is some room for debate on this interpretation and certainly some concierge service providers are stating that you can use your HSA to pay their fees because the fee is part of the medical service, but the conservative answer is that these amenities are NOT qualified medical expenses.
  • Hybrid Programs. Concierge medicine is an emerging area with a wide-variety of program offerings. One common hybrid offering is to provide the retainer/amenities program but also provide one physical included in the annual retainer fee. In this case, a portion of the fee is a qualified medical expense, the cost of the physical (and other included eligible medical services). If the program provides an itemized invoice (or you can find out the costs), you can use your HSA to pay for the annual physical but not the fee for access. There is also a potential timing issue with how these programs work and to be conservative you are best off paying the program fee with non-HSA dollars and then reimbursing yourself for the cost of the annual physical out of your HSA after you receive the physical.
  • Insurance Programs. Some of the programs operate more like insurance where you pay an upfront fee for an unlimited number of doctor visits/contacts and for limited (or unlimited) additional diagnostic and other services included. You generally cannot buy insurance with your HSA, so if the concierge medical program is considered insurance, you cannot use your HSA to pay for it and will also likely lose eligibility for an HSA).
  • Pre-Paid Medical Programs. Another approach to concierge medicine is closer to a pre-paid medical services model. You buy a package of services that includes a set number of visits and other medical services. Rather than paying separately, you buy a package. Assuming the services provided under this program are all qualified medical expenses you could use your HSA to pay for those expenses. Given uncertainly on how the rules for these services work the conservative approach would be to pay the program fee from non-HSA funds and then reimburse yourself from your HSA for the fair market value of each medical service received. If you do not take advantage of the all the medical services in the package you may not be able to reimburse yourself for the full cost of the package.

7. Cosmetic procedures

Generally, cosmetic surgery is not qualified. This includes any procedure that is directed at improving the patient’s appearance and does not meaningfully promote the “proper function of the body or prevent or treat illness or disease.”  However, cosmetic surgery that is necessary to improve a deformity arising from a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease IS eligible. As an example: Anne undergoes surgery that removes a breast as part of treatment for cancer. She pays a surgeon to reconstruct the breast. The surgery to reconstruct the breast corrects a deformity directly related to the disease. The cost of the surgery is an eligible medical expense.

8. Capital expenses

Home-related expenses: Capital expenditures can be qualified medical expenses if the main purpose is medical care for the HSA owner, the HSA owner’s spouse, or the HSA owner’s dependent. The cost of permanent improvements that increase the value of your property may only partially be included as a qualified medical expense. The cost of the improvement is reduced by the increase in the value of the property. The difference is the medical expense. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense. Examples of types of capital expenditures that could be qualified medical expenses include:

  • Constructing entrance or exit ramps for your home
  • Widening doorways at entrances or exits in your home
  • Widening or otherwise modifying hallways and interior doorways
  • Installing railing, support bars, or other modifications to bathrooms
  • Lowering or modifying kitchen cabinets and equipment
  • Moving or modifying electrical outlets and fixtures
  • Installing porch lifts and other forms of lifts (elevators generally add value to the home)
  • Modifying fire alarms, smoke detectors, and other warning systems
  • Modifying stairways
  • Adding handrails or grab bars anywhere
  • Modifying hardware on doors
  • Modifying areas in front of entrance and exit doorways
  • Grading the ground to provide access to the residence

Only reasonable costs to accommodate a home to a disabled condition are considered medical care. Additional costs for the personal motives, such as for architectural or aesthetic reasons, are not medical expenses.

Non-home related expenses: Some non-home related capital expenses may also be allowed if necessary to treat or cure a specific ailment or disease. This may include improvements to a car, a workstation (a standing desk), or personal item (improved toothbrush). Example: Jane’s doctor informs Jane that she needs to buy a specially designed bed to accommodate her medical condition. The bed is necessary to treat a specific medical issue and is not an improvement for general health. The doctor provides Jane a letter explaining the necessity. Jane buys the special bed for $3,000 which is $2,000 more than a normal non-modified bed would cost. Jane can use her HSA to pay for the additional expense of $2,000.

9. Health insurance premiums

Generally HSAs cannot be used to pay for health insurance premiums. However, there are a number of important exceptions. IRS Publication 969 details how HSA owners can use their HSA tax-free and penalty-free to pay for the following coverages:

Long-term care insurance

Subject to dollar limitations, an HSA owner can use an HSA to pay for long-term care insurance coverage for himself and his spouse. The amount of expense allowed is based on age and adjusted for inflation each year.

For 2014, the numbers are:

  • 40 years old or less: $370
  • Older than 40 but not more than 50 (not 51 yet): $700
  • Older than 50 but not more than 60 (not 61 yet): $1,400
  • Older than 60 but not more than 70 (not 71 yet): $3,720
  • Older than 70 (71 or older): $4,660

COBRA Plan coverages

An HSA owner can use his or her HSA to pay for health coverage purchased through a COBRA continuation plan for himself and/or a spouse (generally offered by employers when you separate from service)

Payment of health insurance while unemployed

Payment of premiums for health insurance coverage while receiving unemployment compensation under a federal or state law is allowed as a tax-free distribution from an HSA.

Medicare premiums

Payment for Medicare premiums (other than Medigap) and other health care coverage for HSA owners age sixty-five and over is allowed including:

  • Medicare Part A: (hospital insurance)
  • Medicare Part B: (medical insurance)
  • Medicare Part C: (Medicare Advantage Plans – run by Medicare-approved private plans that replace Parts A and B and possibly D)
  • Medicare Part D: (prescription drug coverage run by Medicare-approved private insurance companies)
  • Employee Health Plan: The employee share of premiums for employer-sponsored health care including premiums for employee-sponsored retiree health care 

However, an HSA owner cannot use his or her HSA to pay for Medigap insurance premiums. Medigap is Medicare Supplement Insurance, sold by private companies to help cover expenses that Medicare does not cover such as copayments, coinsurance and deductibles.

Clearly, there are exceptions to the rules for qualified medical expenses of which an HSA owner can avail themselves. As mentioned at the start of this article, the HSA comes with many advantages, but also some responsibilities. To maximize the value of the Health Savings Account, it is prudent that the owner take some pro-active steps including:

  • Doing the “homework” to ascertain and verify what expenses will meet the test as a “qualified expense”
  • Working with his or her doctor or health professional to gain the necessary authorizations or prescriptions; and
  • Save those records – make sure that comprehensive and detailed records such as prescriptions, letters and receipts are kept in the event of an IRS audit

In this manner, the HSA owner will ensure the maximum value of the account and hopefully be able to keep more of his or her hard-earned dollars.


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