An HSA distribution is a withdrawal from your health savings business relationship. HSA distributions taken to pay for eligible medical expenses are not taxable, but nonetheless must be reported to the Internal Revenue Service (IRS). If you accept a distribution for purposes other than paying for covered medical expenses, it can have serious tax consequences, as you will be taxed on the withdrawn funds at your ordinary income tax rate and could potentially likewise owe a 20% penalization.

Here'southward what y'all need to know most HSA distribution rules and your obligations to the IRS when you brand them.

Piece of paper labeled HSA with calculator and pen sitting on it.

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What is an HSA distribution?

An HSA distribution is a withdrawal of money from your health savings business relationship. This could take the form of a debit card transaction, a check, or a straight transfer of funds from your HSA into another fiscal business relationship.

HSA distributions are classified into 2 categories:

  • Qualified HSA distributions: These occur when you use coin from your HSA to pay for an eligible medical expense, either by paying the provider direct via debit card issued by your HSA or by paying a provider with your own coin and submitting receipts to your HSA for reimbursement.
  • Non-qualified HSA distributions: These are distributions from your HSA used for whatsoever purpose other than paying eligible medical expenses. The distribution will be taxed as ordinary income and, if yous are not yet 65 years erstwhile, you will generally also pay an boosted 20% tax punishment to the IRS.

Here is the HSA distribution form for 2022

When you lot accept money out of your HSA for any reason, the HSA trustee or custodian must fix an IRS Class 1099-SA. The trustee or custodian who holds your account must consummate this class regardless of whether the money from your HSA is sent direct to y'all or to an eligible medical provider after you receive medical services. The trustee or custodian must betoken the amount of the distribution on the class as well as whether it was a normal distribution, a return of excess contributions, a distribution made afterward the account holder became disabled, or a distribution made subsequently the account holder's decease.

The trustee or custodian will transport a copy of IRS Course 1099-SA to you, as well as to the IRS. In plow you lot volition demand to utilise the information on IRS Form 1099-SA to complete IRS Course 8889, which must be included with your 1040 form when you file your taxes if you have an HSA.

Form 8889 both allows y'all to inform the IRS of your HSA contributions and your distributions and helps you calculate whether any portion of your distribution is taxable and/or subject to the 20% penalty for nonqualified distributions.

Qualified HSA distributions

Qualified HSA distributions are distributions made for eligible medical expenses, and are thus not subject to either income tax at your ordinary charge per unit or to the 20% penalty for nonqualified distributions.

Eligible medical expenses generally include those that would more often than not exist considered tax deductible if you run across the threshold for deducting medical expenses. IRS Publication 502 has a detailed list of what medical expenses you lot tin pay with HSA funds in order for the distribution to be considered qualified. They include prescription drugs, most types of dental intendance, chiropractic care, acupuncture, fertility treatments, eyeglasses and contact lenses, service animals, and more.

HSA distributions and taxes

HSAs are a very valuable type of investment business relationship considering you tin make contributions with pre-revenue enhancement funds, allow your money to abound tax-costless, and make tax-free withdrawals for medical expenses. Most other tax-advantaged accounts, such as IRAs and 401(k)s, let either pre-revenue enhancement contributions or tax-free withdrawals -- not both, as the HSA does.

Although a qualified HSA distribution is not taxable, you however must file IRS Form 8889 to written report whatever distributions made during the year.

Withal, if yous have made nonqualified distributions because you lot took money out of your HSA that you did not utilize to pay for eligible medical services, you will exist taxed on the distribution at your ordinary income tax rate. If y'all accept non yet reached age 65, you will as well be subject to a twenty% penalty on the withdrawn funds.

Those who are 65 or older may make nonqualified distributions without incurring the extra penalty, paying only ordinary income tax. In other words, HSA distributions made after age 65 are treated similar those made from a 401(k) or traditional IRA. Considering of this added flexibility, HSAs are often used equally a retirement savings account.