Employees can withdraw money from their health savings account (HSA) at any time and, if the money is used for qualified medical expenses, the withdrawal is tax free. If used for any other purpose, however, the withdrawal is subject to income taxes (and a 20% excise tax if the accountholder is under age 65).

Qualified medical expenses for purposes of an HSA generally are the same expenses that would qualify as an itemized deduction on the individual’s tax return. They include a wide scope of health expenses, including medical, prescription drug, dental, and vision care expenses, provided they are not reimbursed by insurance or other programs. IRS Publication 502 Medical and Dental Expenses includes a list. Beginning in 2020, over-the-counter medications and menstrual care products are considered covered expenses. An expense that is paid with HSA funds cannot be included as an itemized deduction.

Expenses for the employee, spouse, and the employee’s tax dependents (usually limited to children under age 19 or students under age 24) may all qualify.

One difference between the HSA rules and the itemized deduction rules is that most types of health insurance “premiums” (including coverage contributions for uninsured plans) are not qualified medical expenses for HSAs. On the other hand, premiums in the following limited cases do meet the definition of qualified medical expenses for HSAs:

  • Premiums for COBRA continuation coverage;
  • Premiums for coverage if unemployed and receiving federal or state unemployment insurance;
  • Medicare premiums, if the accountholder is age 65 or older and the premiums are for the accountholder or spouse who first became eligible for Medicare at age 65 or later;
  • Contributions for an employer-sponsored group retiree health plan, if age 65 or over; or
  • Certain long-term care insurance premiums (seek the advice of a tax professional as the rules on long-term care insurance are complex).

Note that premiums for Medicare Supplement policies (often referred to as Medigap) are not qualified medical expenses, regardless of age.

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