So you did a lot of research, enrolled in an HSA compatible HDHP, and have even been contributing regularly to your HSA. You have been saving and even investing your funds. Now you need to spend some of it on medical care. What expenses qualify, and can I use my HSA?
First off, we know that purchases of Qualified Medical Expenses (QME) using HSA funds result in no tax being levied on the withdrawal. This is the final step to achieving tax-free medical spending using the Triple Tax Advantage.
However, it is important to understand what expenses are considered qualified. Doing so allows you to plan your health care spending and maximize the value of those dollars. By educating yourself, you reduce the risk of incorrectly spending HSA funds. Accidentally spending your HSA on non-qualified expenses could cause you to file your taxes incorrectly. This may result in an unexpected tax payment or penalties being due.
Never fear, understanding QME is quite simple. Their scope can be defined by the following:
Who can QME be spent on?
The short answer is you, your spouse, and any dependents you can claim on your taxes. Even if your spouse or your dependents have their own HSA account, you can still pay for their medical care.
When does QME spending occur?
To be considered qualified, expenses must occur after you have established an HSA. This means you have opened and contributed to an HSA. You cannot establish an HSA until the first day of the month following your enrollment in a qualified HDHP. State laws may determine when your HSA account is officially established.
The lesson here is to setup and contribute to your HSA before you need it. There is no better time than now as you can complete this in a few minutes.
What is considered a QME?
The IRS has been very lenient with items that are considered QME. If your expense is remotely medical and reasonable, it seems like it is covered. This serves as further incentive to participate in HSA accounts.
Here is my unofficial shortlist:
- Qualified: anything billed by a doctor/hospital/urgent care, optometrist, chiropractor, dental clinic (excluding cosmetic); prescriptions, and personal medical devises such as contacts, glasses, hearing aids, prosthesis
- NOT Qualified: Insurance premiums, cosmetic surgery, personal use items (i.e. toothbrush), weight loss programs, health club memberships. (Note: there are some other funny ones in there, like hair transplant. At least someone asked; closed mouth doesn’t get fed).
IRS Publication 502 provides a very thorough breakdown of what is considered QME. If you are unsure of whether an expense is qualified, check that list.
The opening paragraphs provide a good definition and meaning of the term.
Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.
Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.
How can I pay for my QME?
You can pretty much pay for your QME however you want – the key is in good record keeping. However, here are the two main options and how they are handled.
- Pay using your HSA – when you incur a medical expense, you can pay for it directly out of your HSA. This can be in the form of a debit card or check. HSA Bank, who is my HSA custodian, provides free debit cards but charges a small fee for checks. This method requires very little record keeping as the transaction is complete.
- Pay out of pocket – you can instead opt to pay for your expenses out of pocket and reimburse yourself at the time of your choosing. The advantage here is the ‘at a time of your choosing’. This can be that same day or 40 years in the future. Consider how valuable that $45 visit will be in 40 years earning 5% per year (answer: $673). Paying out of pocket allows you to build up unreimbursed QME credits. I call this a backup emergency fundas you can pull money – tax free – from the HSA in a pinch.Either way, make sure you save your receipt and backup a copy when paying out of pocket. Proper record keeping is key for surviving an audit and reconciling your future HSA reimbursement.