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8 Common Questions About HSA Distributions

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The fall may bring you questions about health savings account eligibility and enrollment.

Here are answers to eight common questions about HSA distributions.

1. Do HSAs follow the same rules as flexible spending accounts and health reimbursement arrangements as to what is a qualified medical expense?

Generally, yes. The same IRS guidance on qualified medical expense (IRS Publication 502) applies to HSAs, FSAs and HRAs with some key differences outlined below. IRS Publication 502 serves as a starting point to determine whether an expense is qualified or not and is not the ending point as the facts and circumstances matter.

  • Insurance Premiums. HSAs allow for the purchase of insurance premiums in some cases in a manner different than FSAs and HRAs.

  • Death Distributions. HSA assets pass to named beneficiaries in the case of death of the HSA owner with a special rule that spouses can treat it as their own.

  • Timing of Distributions. HSAs are more flexible on the timing of distributions.

  • Distributions for General Expenses. HSAs can be used for nonqualified medical expenses if the HSA owner is willing to pay taxes and penalties.

  • Age Sixty-Five Distributions. At age sixty-five HSA owners can use the HSA for any reason penalty-free.

  • Rollovers/Transfers. HSAs allow for an HSA owner to move the funds to a new custodian at the HSA owner’s discretion.

Caution: Employers can further restrict the definition of a qualified medical expense for FSA and HRAs, but not HSAs.

2. What exactly, for this purpose, is a prescription drug?

A prescription drug is a licensed medication or biological that requires a prescription for its dispensing. Under HSA rules an HSA owner may use his or her HSA to pay for over-the-counter drugs so long as the HSA owner obtains a “prescription” even if the drug is available without a prescription.

Marijuana (Photo: Thinkstock)

(Photo: Thinkstock)

For HSAs, a “prescription” means a written or electronic order for a medicine or drug that meets the legal requirements in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue prescriptions in that state.

3. Is medical marijuana qualified with a prescription?

No. Marijuana is a banned substance under federal law. Even if the taxpayer lives in a state that has legalized marijuana and the taxpayer has a valid prescription, the HSA owner cannot use the HSA to pay for the marijuana.

4. Are prescription drugs from Canada qualified?

Generally, no. Individuals cannot buy prescription drugs from another country and import them into the U.S. because that process is usually illegal – although many people do it. If an HSA owner buys drugs from Canada in violation of U.S. law, the HSA owner cannot use the HSA to pay for them.

If an HSA owner buys a legally imported foreign prescription drug then it is a qualified medical expense (this would include drugs bought legally in the U.S. but were produced overseas or are produced by foreign drug companies).

An HSA owner can include the cost of a prescribed drug that is both purchased and consumed in another country provided the drug is legal in both U.S. and the foreign country.

5. Are over-the-counter drugs qualified?

Generally, no. The Affordable Care Act eliminated over-the-counter drugs as a qualified medical expense starting in 2011. HSA owners now need a prescription for a drug in order for the drug to qualify as a qualified medical expense. Insulin is an exception to this rule.

Note: If an HSA owner gets a prescription for an over-the-counter drug, then the HSA owner can use an HSA for the expense.

Example. Tamara feels sick and generally buys an over-the-counter drug for her cold symptoms. The over-the-counter cold medicine does not meet the qualified medical expense rules unless Tamara gets a prescription for the over-the-counter drug from her doctor. She will not need to 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 then purchase).

6. Are over-the-counter drugs purchased prior to 2011 still eligible?

Yes. Prior to 2011, over-the-counter drugs were qualified medical expense. HSA owners that paid for otherwise unreimbursed over-the-counter drug expense from before 2011 and after their HSA establishment date, can use an HSA to reimburse for those expenses.

7. Can medical professionals prescribe over-the-counter drugs?

Yes. 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.

8. Is a doctor recommendation for an over-the-counter drug the same as a prescription?

No. “Prescription” means a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.

— Read 9 FAQs about HSAs, FSAs and HRAs on ThinkAdvisor.

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