When distributions from a Health Savings Account (HSA) are used to pay for qualified medical expenses of the account owner, his or her spouse, or dependents, the distributions are excluded from taxable gross income -- even if the individual is not currently eligible to make HSA contributions.
Distributions not used for qualified medical expenses are includable in gross income and, for applicants under age 65, subject to an additional 10% tax.
If the Health Savings Account (HSA) beneficiary is no longer eligible to make contributions to the HSA (e.g., over age 65, entitled to Medicare or no longer enrolled in a High-Deductible Health Plan), HSA distributions used to pay qualified medical expense continue to be exempt from gross income.
As the owner of a Health Savings Account (HSA), it is up to you to determine what medical expenses are eligible for a qualified distribution from your HSA. Keep good records of your health care expenses in case the IRS ever needs to review your use of HSA funds.
The financial institution holding your HSA funds is not involved in determining eligible expenses and qualified distributions. They are just providing financial transactions -- accepting your deposits and honoring your requests to withdraw funds.
Likewise, an employer making contributions to an employee's HSA makes no determination of qualified medical expenses Once the employer money is deposited in the account, it belongs to the HSA owner and it is up to the owner to determine, with accountability to the IRS, expenses eligible for qualified HSA distributions.
Going back to January 1, 2005, there is no deadline on using HSA funds to reimburse yourself for eligible expenses that have occurred since you established the HSA.
For example, in 2013, you can use your HSA to reimburse yourself for a qualified expense that occurred in 2011 -- as long as your HSA existed at the time that expense occurred.
When you incur a qualified medical expense, you are under no obligation to pay the expense with HSA funds. You are free to leave the HSA alone and use it as a savings account.
We recommend using your HSA to fund qualified medical expenses, but, as the HSA owner, it is up to you to decide how to spend or not spend the money in your HSA.
If you have closed one HSA and you are opening another, you must deposit funds into the new HSA within 60 days of distribution from the old HSA. Otherwise, you will have to pay taxes on the amount distributed.
If the Health Savings Account (HSA) owner dies, the HSA becomes the property of the named beneficiary. If the spouse is the beneficiary, the HSA can continue and the surviving spouse is subject to income tax on HSA distributions not used for qualified medical expenses.
If the HSA funds pass to a person other than the spouse, the HSA terminates as of the date of death, and the beneficiary is required to include the HSA assets in gross income. The taxable amount is reduced by any HSA payments for the decedent's qualified medical expenses, if paid within one year after death.