Distributions From an HSA

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Distributions From an HSA

You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA.

You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. You do not have to make distributions from your HSA each year.

If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.

Generally, a distribution is money you get from your health savings account. Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.

Qualified medical expenses. Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses.

Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for HSA purposes. A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug:

  1. Requires a prescription,

  2. Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or

  3. Is insulin.

For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. State law determines when an HSA is established. An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established.

If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses.

Qualified medical expenses are those incurred by the following persons.

  1. You and your spouse.

  2. All dependents you claim on your tax return.

  3. Any person you could have claimed as a dependent on your return except that:

    1. The person filed a joint return,

    2. The person had gross income of $3,800 or more, or

    3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2012 return.

For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA.

Insurance premiums. You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:
  1. Long-term care insurance.

  2. Health care continuation coverage (such as coverage under COBRA).

  3. Health care coverage while receiving unemployment compensation under federal or state law.

  4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).

Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses.

Health coverage tax credit. You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. See Publication 502 for more information on this credit.

Deemed distributions from HSAs. The following situations result in deemed taxable distributions from your HSA.
  • You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2012. Your account ceases to be an HSA as of January 1, 2012, and you must include the fair market value of all assets in the account as of January 1, 2012, on Form 8889, line 14a.

  • You used any portion of any of your HSAs as security for a loan at any time in 2012. You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR, line 21.

Examples of prohibited transactions include the direct or indirect:

  • Sale, exchange, or leasing of property between you and the HSA,

  • Lending of money between you and the HSA,

  • Furnishing goods, services, or facilities between you and the HSA, and

  • Transfer to or use by you, or for your benefit, of any assets of the HSA.

Any deemed distribution will not be treated as used to pay qualified medical expenses. These distributions are included in your income and are subject to the additional 20% tax, discussed later.

Recordkeeping. You must keep records sufficient to show that:

  • The distributions were exclusively to pay or reimburse qualified medical expenses,

  • The qualified medical expenses had not been previously paid or reimbursed from another source, and

  • The medical expenses had not been taken as an itemized deduction in any year.

Do not send these records with your tax return. Keep them with your tax records.

Reporting Distributions on Your Return

How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier).

  • If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. Follow the instructions for the form and file it with your Form 1040 or Form 1040NR.

  • If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. If you have a taxable HSA distribution, include it in the total on Form 1040 or Form 1040NR, line 21, and enter “HSA” and the amount on the dotted line next to line 21. You may have to pay an additional 20% tax on your taxable distribution.

HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA.

Additional tax. There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. Report the additional tax in the total on Form 1040, line 60, or Form 1040NR, line 59, and enter “HSA” and the amount on the dotted line next to that line.

Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.