Distributions from an HSA*
When can I receive distributions from an HSA?
You can take a distribution from your HSA at any time. A transfer of funds from your HSA Deposit Account to another investment made available through us is not considered a “distribution,” and remains part of your HSA custodial account at UMB Bank.
How are distributions from an HSA taxed?
Distributions from an HSA for the qualified medical expenses of yourself or your spouse or federal tax dependents are generally excludable from income for federal income tax purposes if such expenses are not covered by insurance. Distributions used for any other purpose are includible in income and may also be subject to an additional 20 percent tax (see below).
When am I subject to the 20 percent premature distribution penalty tax?
Generally, if an HSA distribution is included in your gross income because it is not made for “qualified medical expenses,” it will also be subject to an additional 20 percent penalty tax. This 20 percent penalty tax does not apply to distributions made after your death, disability or attainment of age 65.
What happens if I receive an HSA distribution as the result of a factual mistake?
If there is clear and convincing evidence that amounts were distributed from an HSA because of a mistake of fact due to reasonable cause, you may repay the mistaken distribution no later than April 15 following the first year you knew or should have known the distribution was a mistake. Under these circumstances, the distribution is not included in your gross income or subject to the 20 percent additional tax, and the repayment is not subject to the six percent excise tax for excess contributions.
What medical expenses are eligible for taxfree distributions from my HSA
Distributions made for “qualified medical expenses” are generally excludable from income. For this purpose, the term “qualified medical expenses” means amounts paid for the medical care, as defined in Section 213(d) of the Code, of yourself, your spouse, or your tax dependents, but only to the extent such amounts are not compensated by insurance or otherwise. This includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body, as well as for transportation primarily for and essential to such care. Qualified medical expenses do not include insurance premiums other than premiums for long-term care insurance, premiums on a health plan during any period of continuation coverage required by Federal law (e.g., “COBRA” coverage), or premiums for healthcare coverage while an individual receives unemployment compensation.
Is my custodian responsible for determining whether HSA distributions are used for medical expenses
As custodian, UMB has no responsibility for determining whether distributions from your HSA are used for qualified medical expenses. It is your sole responsibility to determine the tax consequences of any distributions, for maintaining adequate records for tax purposes, and for paying any taxes and penalties arising as a result of any such distribution. You are encouraged to consult with your legal or tax adviser concerning any questions you may have.
If I am a retiree who is enrolled in Medicare, may I receive a tax-free distribution from an HSA to reimburse my Medicare premiums?
Such a distribution will be tax-free. When premiums for Medicare are deducted from Social Security benefit payments, an HSA distribution to reimburse an amount equal to the Medicare premium deduction is a qualified medical expense.
You’ll hear from HSA experts who will cover key topics that your clients and other HSA account holders probably don’t understand and discuss several lesser-known strategies to help them take their HSA game to the next level.‡