What a health savings account may be spent on

The definition borrows one that already exists

The statute does not write a fresh test for what an account may pay for. It imports one.

Qualified medical expenses means, with respect to an account beneficiary, amounts paid by that beneficiary for medical care as defined in the deduction statute, for the individual, the individual's spouse and any dependent as defined, but only to the extent those amounts are not compensated for by insurance or otherwise. Amounts paid for menstrual care products are treated as paid for medical care.

So the substantive question is the same one the deduction asks: is this medical care as that term is defined. A separate article on this site sets out that definition and the exclusions attached to it, including the limitation that a medicine or drug counts only if it is a prescribed drug or is insulin.

The published guidance repeats the definition in the same terms and lists whose expenses can be included: the account holder and spouse, all dependents claimed on the return, and any person who could have been claimed as a dependent but for three named circumstances.

One category is carved out and then partly restored. Payments for insurance are outside the definition, except for coverage during a period of federally required continuation coverage, a qualified long-term care insurance contract, health coverage while receiving unemployment compensation, and, for a beneficiary who has reached a specified age, health insurance other than a supplemental policy.

This site does not give tax advice, and nothing here says what any reader may pay for from an account.

The condition the deduction does not have

The account rules add a timing condition that has no counterpart in the deduction.

The published guidance states that tax-free distributions can be received to pay or be reimbursed for qualified medical expenses incurred after the account is established, and that expenses incurred before the account is established are not qualified medical expenses for these purposes.

When an account is established is not decided by federal tax law. The guidance states that state law determines it.

Two refinements follow. An account funded by amounts rolled over from an earlier account is established on the date that earlier account was established. And where a person is treated as eligible for the whole year under a last-month rule for contribution purposes, only expenses incurred after the account was actually established qualify.

The practical consequence is a sequencing point rather than a substantive one. An expense can be squarely medical care and still fall outside the account rules because of when it was incurred relative to when the account came into existence.

There is no corresponding pressure to spend. The guidance states plainly that withdrawals do not have to be made each year.

What happens when a distribution is used for something else

The statute states the consequence in two symmetrical sentences.

Any amount paid or distributed out of the account that is used exclusively to pay qualified medical expenses of an account beneficiary is not includible in gross income.

Any amount paid or distributed out of the account that is not used exclusively to pay the qualified medical expenses of the account beneficiary is included in the gross income of that beneficiary.

A further tax applies to the part of a distribution not used for qualified medical expenses. The statute sets that additional tax as a percentage of the amount includible, and the published guidance states the same percentage in its own words.

The additional tax does not apply to distributions made after the date the beneficiary is disabled, reaches a specified age, or dies.

Certain events are treated as deemed distributions, including engaging in a prohibited transaction with respect to the account or using any portion of it as security for a loan, and the guidance states that deemed distributions are not treated as used to pay qualified medical expenses.

The rule against counting the same expense twice

Two provisions, one statutory and one in the guidance, prevent the same expense doing double duty.

The statute provides that for the purpose of determining the amount of the medical expense deduction, any payment or distribution out of the account for qualified medical expenses is not treated as an expense paid for medical care.

The guidance states the same from the taxpayer's side: qualified medical expenses equal to a tax-free distribution from the account cannot also be deducted as an itemised deduction.

That is one of the three things the recordkeeping guidance is designed to establish, and it explains why the records asked for are about the history of an expense rather than only its nature.

The published guidance sets out what has to be kept: records sufficient to show that the distributions were exclusively to pay or reimburse qualified medical expenses, that those expenses had not previously been paid or reimbursed from another source, and that they had not been taken as an itemised deduction in any year.

It adds that these records are not sent with the return; they are kept with the taxpayer's tax records. Distributions themselves are reported to the account holder and to the tax authority by the trustee on a designated form, and are reported on the return on a separate designated form.

The figures that change every year, and why none appears here

The account rules contain several dollar amounts, and every one of them moves.

The statute sets base monthly limitation amounts for self-only and family coverage, and base amounts in the definition of a high deductible health plan. A separate subsection then increases each of those dollar amounts every year by a cost-of-living adjustment calculated against a named base calendar year, with increases rounded to a stated multiple.

That subsection also imposes a publication duty. The adjusted amounts for taxable years beginning in any calendar year have to be published no later than the first of June in the preceding calendar year.

So the current figures live in an annual notice rather than in the statute, and they change on a schedule. No current-year contribution limit, deductible floor or out-of-pocket maximum is asserted anywhere in this article, because none was read from the notice that publishes them.

An additional contribution amount is available to a beneficiary who has reached a specified age before the close of the taxable year, set by a table in the statute that reached a fixed figure and stays there. That figure is not printed here either, for consistency with the house standard on dollar amounts in prose.

Anyone who needs a current number should take it from the annual notice or from a tax adviser rather than from a comparison site, and anything about a particular account belongs with the plan administrator.

Sources

Each document below is named as it names itself, with the date printed on that document rather than the day it was read.

1. United States Code Title 26, Section 223, Health savings accounts — read at subsections (a) through (h), including the definition of qualified medical expenses and the insurance carve-out and its exceptions at (d)(2), the treatment of distributions at (f)(1), (f)(2) and (f)(4), the coordination with the medical expense deduction at (f)(6), and the cost-of-living adjustment and publication duty at (g), 2024 Main Edition — Office of the Law Revision Counsel, U.S. House of Representatives, January 2025
2. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans — read at Distributions From an HSA, Qualified medical expenses, Insurance premiums, Deemed distributions from HSAs, Recordkeeping, Reporting Distributions on Your Return, Additional tax and Exceptions — Internal Revenue Service, January 2025