Distributions from an HSA
A distribution is money you get from your HSA using your 3Rivers debit card, bill payer service, or online/mobile access. HSA distributions are tax-free if they are used to pay for qualified medical expenses.
Distributions for non-eligible expenses are subject to income tax and a penalty of 20% of the amount withdrawn. This penalty will be waived if you are over the age of 65 or in the case of a death or disability.
Expenses incurred before you establish your HSA, generally are not qualified. Most insurance premiums are also not considered a qualified medical expense (some exceptions apply for specifics refer to the IRS website or a tax advisor).
You typically can use the HSA funds on anyone that you can claim on your tax return. This can get tricky in certain situations, so it may be best to clarify using the IRS Publication 969 or seek tax advice.
Even if you are no longer eligible to contribute to your HSA, you’re still able to use the funds for qualified medical expenses until the funds are gone. The funds in the HSA carry over from year to year.
Did you know, borrowing from your HSA is a prohibited transaction? Allowing your HSA Checking to go into the negative or using it as a security loan can have some serious tax consequences. Luckily, 3Rivers has securities in place to help you avoid this
mistake. However, there are instances where it can happen.
The best record to keep for all of your HSA distributions would be copies of medical bills, receipts, or detailed statement from your medical expert.
Treatment of HSA upon the owner’s death:
- It is important to establish a beneficiary on these accounts. Since these are not owned by more than one individual, the transfer of ownership doesn’t exist.
- If an HSA owner passes away and the spouse is the designated beneficiary they can inherit the funds tax-free and continue to use the HSA funds for qualified medical expenses.
- If any non-spouse is designated the account stops being an HSA and the fair market value is taxable income under that beneficiary.
- If there is no beneficiary designated, the HSA funds go to the estate of the owner.
- Any qualified medical expense for the decedent that are paid by the beneficiary (other than the estate) for the decedent can be excluded from the taxable amount.