Health Savings Accounts - How do they know which expenses are qualified?
January 10, 2016 8:55 AM Subscribe
Specifically, how can I be sure that my medication purchases at the grocery store are properly tallied as 'qualified expenses?' More generally, how does the IRS keep track of your purchases using funds from an HSA? What's to stop someone from using their HSA to pay for non-medical expenses?
I have a high deductible insurance plan and Health Savings Account (HSA) through my employer. The medication I would purchase is much more expensive through the pharmacy than over the counter (I have a prescription). Therefore, I have been buying this drug OTC at the grocery store using funds from my HSA.
From the IRS: an HSA only covers 'qualified medical expenses' (for which there is a long definition with multiple categories).
I have a high deductible insurance plan and Health Savings Account (HSA) through my employer. The medication I would purchase is much more expensive through the pharmacy than over the counter (I have a prescription). Therefore, I have been buying this drug OTC at the grocery store using funds from my HSA.
From the IRS: an HSA only covers 'qualified medical expenses' (for which there is a long definition with multiple categories).
I believe some HSAs have debit cards which only permit certain kinds of purchases, but in general there is nothing to stop you from buying whatever you want with the money in your HSA. The IRS will only find out if they audit you and you don't have receipts or other records to support what you've spent.
OTC medication purchases via HSA used to be allowed but that changed a couple years ago. You're probably OK as it's still considered a qualified expense if you have a prescription. In general, though, OTC purchases are limited to devices & supplies (e.g. crutches, bandages) rather than medications.
posted by magicbus at 9:18 AM on January 10, 2016 [3 favorites]
OTC medication purchases via HSA used to be allowed but that changed a couple years ago. You're probably OK as it's still considered a qualified expense if you have a prescription. In general, though, OTC purchases are limited to devices & supplies (e.g. crutches, bandages) rather than medications.
posted by magicbus at 9:18 AM on January 10, 2016 [3 favorites]
You're free use your HSA to make non-qualified purchases but the money you spend then becomes taxable income. You report HSA activity on Form 8889. The IRS can ask for receipts.
posted by eugenen at 9:27 AM on January 10, 2016
posted by eugenen at 9:27 AM on January 10, 2016
Your HSA card may audit your expenses and ask for receipts. I went through this for my prescription glasses last year. I also went through it for a dermatological expense.
Save your receipts.
posted by Ruthless Bunny at 9:39 AM on January 10, 2016 [1 favorite]
Save your receipts.
posted by Ruthless Bunny at 9:39 AM on January 10, 2016 [1 favorite]
It is more or less the honor system, with the caveat that the IRS is free to audit you at their discretion. I put all medical bills on my personal credit card, and then use my HSA's website to transfer an equivalent amount to my checking account. No receipt is required, but I do save them in a folder just in case.
OTC medication is not reimbursable from an HSA without a prescription. I do not know if the prescription is supposed to be specifically for the OTC version.
posted by deadweightloss at 9:40 AM on January 10, 2016 [1 favorite]
OTC medication is not reimbursable from an HSA without a prescription. I do not know if the prescription is supposed to be specifically for the OTC version.
posted by deadweightloss at 9:40 AM on January 10, 2016 [1 favorite]
One if the reasons I'm not interested in dealing with an HSA is that with an HSA, it is my responsibility to determine which charges are medically necessary and to retain all the receipts for long-term record keeping and deal with getting into big trouble if I'm audited and have made a mistake.
(This is why FSAs are much easier---you don't have to be the one responsible for making sure you don't mess up.)
posted by leahwrenn at 9:42 AM on January 10, 2016
(This is why FSAs are much easier---you don't have to be the one responsible for making sure you don't mess up.)
posted by leahwrenn at 9:42 AM on January 10, 2016
Yep, you just make the purchases through your HSA via check or debit card-- whatever they gave you. That money had been reserved for you without being taxed, so you're already saving. As long as it's a qualified medical expense listed on IRS form 502, you're golden in case of an audit. Here's the 2014 version:
https://www.irs.gov/pub/irs-pdf/p502.pdf
posted by jessca84 at 9:43 AM on January 10, 2016
https://www.irs.gov/pub/irs-pdf/p502.pdf
posted by jessca84 at 9:43 AM on January 10, 2016
Many stores around here have their HSA eligible inventory tagged in their systems. There's a very short list of things sold outside the pharmacy counter that are explicitly eligible -- contact lens solution is one big category. And for those things, the cash register will apply the HSA card and leave the rest for your regular payment.
posted by zippy at 9:58 AM on January 10, 2016
posted by zippy at 9:58 AM on January 10, 2016
I suppose I could purchase thousands of gallons of contact lens saline solution to fill up my salt water swimming pool. I imagine that would only be caught by an audit.
Dear IRS, I am not doing this.
posted by zippy at 10:03 AM on January 10, 2016 [3 favorites]
Dear IRS, I am not doing this.
posted by zippy at 10:03 AM on January 10, 2016 [3 favorites]
You're free use your HSA to make non-qualified purchases but the money you spend then becomes taxable income.
Keep in mind that before the age of 65, for unqualified withdrawals, you pay both income taxes plus a 20% penalty. After age 65, you only pay income taxes for unqualified withdrawals.
After age 65, you can use your HSA to pay for your Medicare A, B, and D or Medicare Advantage premiums. You cannot use your HSA to pay for Medigap insurance.
Your HSA is most valuable if you use it only for qualified expenses. In that case the income going into your HSA is acquired completely tax free.
As for much of the IRS tax system, it depends on self-reporting and subject to possible audit. It is a crime to intentionally file a fraudulent tax return.
posted by JackFlash at 11:28 AM on January 10, 2016
Keep in mind that before the age of 65, for unqualified withdrawals, you pay both income taxes plus a 20% penalty. After age 65, you only pay income taxes for unqualified withdrawals.
After age 65, you can use your HSA to pay for your Medicare A, B, and D or Medicare Advantage premiums. You cannot use your HSA to pay for Medigap insurance.
Your HSA is most valuable if you use it only for qualified expenses. In that case the income going into your HSA is acquired completely tax free.
As for much of the IRS tax system, it depends on self-reporting and subject to possible audit. It is a crime to intentionally file a fraudulent tax return.
posted by JackFlash at 11:28 AM on January 10, 2016
Also note that you are free to invest any or all of the funds in your HSA in a variety of investment vehicles. The growth is also tax free but, like the original contribution, can only be used for qualified expenses. But that means that if you envision needing to pay for expensive health expenses in the future (from orthodontics to home care), you might consider trying to invest your HSA contributions to increase the total you have available.
posted by devinemissk at 12:39 PM on January 10, 2016
posted by devinemissk at 12:39 PM on January 10, 2016
To answer your question, keep a receipt that make it clear what that the money was spent legitimately. If you need to, make it a separate purchase. In the larger grocery stores here, the receipt prints out the names of the specific items so that should work.
I assume that the process of getting reimbursed is already working for you? Often the main check on your spending happens at that point. If you haven't tried it yet, you should talk to the who ever handles your requests to see what you need to for them. Otherwise, just be sure to document it so if there is ever an audit you can document that the speccing was appropriate.
(i'm assume this is considered a legitimate expense - I'm not up to date on the changing rules for an HSA)
posted by metahawk at 11:07 PM on January 10, 2016
I assume that the process of getting reimbursed is already working for you? Often the main check on your spending happens at that point. If you haven't tried it yet, you should talk to the who ever handles your requests to see what you need to for them. Otherwise, just be sure to document it so if there is ever an audit you can document that the speccing was appropriate.
(i'm assume this is considered a legitimate expense - I'm not up to date on the changing rules for an HSA)
posted by metahawk at 11:07 PM on January 10, 2016
This thread is closed to new comments.
The IRS isn't really involved. It's you and the admin.
posted by JPD at 9:16 AM on January 10, 2016