Reporting to the IRS
To take advantage of your HSAs tax benefits, you'll have to report your HSA activity to the IRS.
It's up to you to keep track of receipts for expenses you pay for with your HSA. You'll get tax forms that detail your distributions for the year. If any of your distributions were used for non-qualified medical expenses, you are responsible for:
- Reporting that to the IRS on IRS Form 8889
- Paying income taxes on the amount
- Possibly paying an additional 20 percent penalty
Special tax implications
Keep in mind the following scenarios that can affect how your HSA is taxed:
- Transfers - If you choose to transfer funds from one HSA to another, you must do so within 60 days of withdrawing the funds to avoid a 10 percent tax penalty.
- Excess contributions - If you contribute more than the allowable amount to your HSA by accident or because you ended coverage in a qualified health plan, you will have to count the extra amount as taxable income and pay a 6 percent penalty. To avoid paying taxes and incurring a penalty, you can fill out an Excess Contribution and Deposit Correction Request Form to have excess funds returned to you. This and other account forms are available after you log in.
- Non-medical expenses - If you are 65 or older or enrolled in Medicare, you can use your HSA for non-medical expenses without incurring a tax penalty. Those distributions will be treated like retirement income and will be subject to normal income tax.
KEEP YOUR HSA OPEN TO SAVE ON TAXES
You can't contribute to your HSA if you're no longer covered by a high-deductible health plan. But, you can still use funds in your HSA to pay for qualified medical expenses tax-free.
See more reasons not to close your HSA