Tax Facts

8836 / How are funds accumulated in an HSA taxed prior to distribution?

Updated: November 20, 2024 at 08:16 AM


Funds accumulated in an HSA are generally exempt from income tax unless the account ceases to be an HSA.1

In addition, rules similar to those applicable to individual retirement arrangements (IRAs) regarding the loss of the income tax exemption for an account where an employee engages in a prohibited transaction2 and those regarding the effect of pledging an account as security3 apply to HSAs. Any amounts treated as distributed under these rules will be treated as not used to pay qualified medical expenses.4






1.  IRC § 223(e)(1).

2.  IRC § 408(e)(2).

3.  IRC § 408(e)(4).

4.  IRC § 223(e)(2).

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