Subparagraph (A) shall not apply if the payment or distribution is made after the account beneficiary becomes disabled within the meaning of section 72(m)(7) or dies. The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a health savings account of such beneficiary which is includible in gross income under paragraph (2) shall be increased by 20 percent of the amount which is so includible. (4) Additional tax on distributions not used for qualified medical expenses. (2) Inclusion of amounts not used for qualified medical expenses.Īny amount paid or distributed out of a health savings account which is not used exclusively to pay the qualified medical expenses of the account beneficiary shall be included in the gross income of such beneficiary. (1) Amounts used for qualified medical expenses.Īny amount paid or distributed out of a health savings account which is used exclusively to pay qualified medical expenses of any account beneficiary shall not be includible in gross income. #Hsa qualified expenses 2021 fullHowever, Medicare enrollment does not affect the tax treatment of his existing HSA balance or distributions.įor full details, see our previous post: How Medicare Affects HSA Eligibility.įor more details on everything ACA, see our ABD 2020 Go All the Way With HSA Guide. That means he can no longer make or receive HSA contributions. Note that if Jose is enrolled in any part of Medicare, he cannot be HSA-eligible. Jose is subject to the 20% additional tax on the distribution because he is over age 65.In other words, only standard ordinary income taxes apply (in the same manner as a 401(k) or IRA distribution). The 20% additional tax does not apply to a non-medical distribution for an individual who:Īn individual is considered disabled if he or she is unable to engage in any substantial gainful activity due to a physical or mental impairment which can be expected to result in death or continue indefinitely.įor more information upon about HSA tax treatment upon death, see our previous post: What Happens to an HSA Upon Death.Īlthough the 20% additional tax does not apply to a non-medical distribution for any individual who meets one of the exceptions, the distribution must still be included in the individual’s gross income. Non-Medical Distributions Upon Reaching Age 65:No 20% Additional Tax (But Income Tax Remains) Jose must also pay a 20% additional tax on the $2,500 distribution ($500 additional tax).Jose must include the $2,500 distribution in his gross income.Jose reports the non-medical distribution on his Form 8889.He uses his HSA to purchase a $2,500 Ultra HD 4K TV.The HSA owner must report non-medical distributions on the Form 8889, which is included with the individual tax return (Form 1040). The distribution will be subject to a 20% additional tax.The distribution will be includible in gross income and.The general rule is that there are two adverse tax consequence of taking a non-medical HSA distribution: Non-Medical Distributions: Subject Income Taxes and a 20% Additional Tax Except in four limited situations, use of an HSA to pay for premium expenses would be a non-medical distribution.įor full details, see our previous post: HSA Distributions for Premium Expenses.Īlso note that individuals may take a qualified tax-free medical distribution from an HSA only for medical expenses incurred after the individual established the HSA.įor full details, see our previous post: HSA Establishment Date. The most significant discrepancy is the general exclusion of premium expenses from the list of HSA-qualified medical expenses. The slight modifications to the list of reimbursable expenses for account-based plans are set forth in IRS Publication 969. The best general IRS overview of what constitutes a §213(d) medical expense is IRS Publication 502.Īlthough in almost all circumstances the Publication 502 list of §213(d) medical expenses mirrors those expenses eligible for tax-free HSA distributions, there are a few differences. HSAs can reimburse only IRC §213(d) qualified medical expenses on a tax-free basis. The HSA is an account owned by the employee with no administrative gatekeeper to limit HSA distributions. Unlike a health FSA or HRA, the HSA can be used for both medical and non-medical expenses. General Rule: HSA Funds Can Be Used for Any Purpose Short Answer: Non-medical HSA distributions are subject to ordinary income tax at all ages, and they are also subject to a 20% additional tax for individuals who are under age 65. Question: What are the tax consequences of using an HSA to pay for non-medical expenses?
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