Health Savings Accounts Explained

The money that you contribute to your HSA is tax-deductible and it can be used to pay for qualified medical expenses not only for yourself, but also for your spouse and tax dependents. Once you put money in your HSA, you can use it to pay for qualified medical expenses now, or save and grow your balance to use later in life or in retirement—all tax-free. Remember to contribute up to the maximum annual amount allowed by the IRS to maximize your tax savings. The current maximum allowed is $3,050 for single coverage and $6,150 for family coverage.

Eligible Medical Expenses

Medical expenses you can have reimbursed through your HSA include services incurred by you or your eligible dependents for the diagnosis, treatment or prevention of disease or for the amounts you pay for transportation to get medical care. In general, deductions allowed for medical expenses on your federal income tax returns according to Internal Revenue Code Section 213(d) may be reimbursed through your HSA. It is possible that changes in the IRS rules can affect the eligible, potentially eligible, and/or ineligible expense categories.

An important note on insurance premiums as eligible medical expenses:

Insurance premiums are generally not considered qualified medical expenses. However, the following types of insurance premiums typically do qualify:

• Continuation coverage under federal law (i.e., COBRA)
• Qualified long-term care insurance contract
• Any health plan maintained while an individual is receiving unemployment compensation under federal or state law
• For accountholders age 65 and over (i.e., those eligible for Medicare), premiums for any health insurance (including Medicare and Medicare Part D premiums) other than a Medicare supplemental policy

Potentially Eligible Medical Expenses

In order to determine eligibility for potentially eligible items, you will need to obtain a Letter of Medical Necessity from your health care provider.

• Current members can obtain a Letter of Medical Necessity to have your health care provider complete at this page:

FREE Letter of Medical Necessity

Excess Cost

Some expenses are only partially reimbursable. This means only the portion of the cost that exceeds the price of a regular item (excess cost) is eligible. You must submit a price comparison for a similar item along with their claim form. If the item is potentially eligible, then you must ALSO submit a Letter of Medical Necessity.

• Example: If your health care provider recommends orthopedic shoes and the cost is $15 more than regular shoes, only the $15 excess cost is eligible for reimbursement.

Capital Expense

A capital expense is an improvement and/or special equipment added to a home or other capital expenditure that may be eligible if the primary purpose is medical care. A Letter of Medical Necessity is required from your health care provider. To submit your capital expense, you must have an appraisal of your home within one year prior to the installation and an appraisal after the installation to determine the value added to the home. The amount eligible is the difference between the cost of the expense and the increase in the additional value of your home. If the improvement/special equipment is used by individuals other than the person needing it for medical care, the eligible amount should be divided by the number of people using the item.

• Example: A ramp is purchased for $3,000 and prior to installation your house is appraised at $100,000. After installation of the ramp your house is appraised for $101,000. The amount that is eligible under your HSA is $2,000. If you have questions about a capital expense, please contact your employer or financial institution for a more detailed explanation.

Changes to over-the-counter medical expenses in 2011

Effective January 1, 2011, expenses for over-the-counter (OTC) drugs will not be eligible for payment or reimbursement from an HSA without a doctor’s prescription. This change is a result of new healthcare reform legislation. A few examples of OTC medicines that will require a doctor’s prescription for payment or reimbursement from an HSA are:

• Acid controllers
• Allergy and sinus medications
• Cold, cough, and flu medications
• Pain relief medications
• Sleep aids and sedatives

Important Reminders About Qualified Medical Expenses

• Items that are merely beneficial to an individual’s general good health, such as vitamins or dietary supplements, are not qualified medical expenses unless your physician can link such items to a specific medical disease or requirement by writing a Letter of Medical Necessity.
• Drugs must be purchased legally.
• Remember to save your receipts and your doctor’s prescriptions for OTC medicines for tax purposes.
• There may be situations when your doctor recommends a treatment that will be good for your health, but it still may be considered ineligible, such as a vacation.
• As the HSA owner, you are ultimately responsible for determining whether a healthcare expense is eligible for reimbursement from your HSA.
• If an HSA expenditure is not used for a qualified medical expense, you will be required to pay income tax and a 10 percent penalty on the amount used. (The 10 percent penalty tax does not apply to payments made after your death or disability, or after you reach age 65.) Note: The 10 percent penalty tax has now increased to 20 percent effective January 1, 2011.
• IRS Regulation Section 1.213 states that “[an] expenditure which is merely beneficial to the general health of an individual…is not an expenditure for medical care.” Additionally, IRS Revenue Ruling 2003-102 excludes vitamins by stating that vitamins and dietary supplements are “merely beneficial…to general good health” and, therefore, not reimbursable.
  • Example: If you purchase vitamin C it would not be eligible for reimbursement. However, vitamin C would be eligible if you have scurvy and your doctor completes a letter of medical necessity diagnosing the specific medical condition and necessity for vitamin C treatment. Similarly, glucosamine is not reimbursable unless your doctor has diagnosed you with a specific medical condition—such as arthritis.
• Weight loss medications are considered “cosmetic” and are not reimbursable. However, certain prescribed drugs for weightloss would be reimbursable to treat a medical condition e.g. obesity or high blood pressure.
• Finally, a fitness and wellness program can improve the “general health” of the participant or it can “treat” a specific medical condition. If your doctor diagnoses you with a specific medical condition such as obesity or heart disease, then a fitness and wellness program would be reimbursable with a letter of medical necessity.
• For details and guidelines about your specific HSA/HRA/FSA contact your employer or financial institution.

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Ineligible Medical Expenses:

• Babysitting, childcare, and nursing services for a normal, healthy baby
• Bottled water
• Cleaning service
• Controlled substances obtained in violation of federal law
• Cosmetic surgery and procedures
• Cosmetics, hygiene products and similar items
• Dancing lessons
• Diapers or diaper service
• Diet foods
• Ear or body piercing
• Electrolysis or hair removal
• Feminine hygiene products (e.g., tampons)
• Funeral expenses
• Funeral, cremation or burial expenses
• Hair colorants
• Hair transplants
• Health club dues
• Household help
• Illegal operations and treatments
• Late fees (e.g., for late payment of bills for medical services)
• Lodging while attending a medical conference
• Marijuana obtained in violation of federal law
• Marriage counseling
• Maternity clothes
• Meals
• Medical newsletter
• Missed appointment fees
• New parent/newborn child care classes
• Non-prescription eyeglasses, sunglasses, safety glasses or contacts
• OTC medications (without a doctor’s prescription)
• Personal use items
• Prepayments
• Prescription drug discount program fees
• Prescription drugs and medicines obtained from other countries
• Sports training and activities
• Surrogate expenses
• Swimming lessons
• Swimming pool and maintenance
• Tanning salons and equipment
• Teeth whitening
• Transportation costs of disabled individual commuting to and from work
• Travel for general health improvement
• Vacation or travel
• Veneers
• Veterinary fees
• Vision discount program fees
• Weight loss programs (for improvement of appearance, general health, or sense of well-being)