What records must be kept by the HSA account owner?
The HSA account owner must keep records sufficient to later show that:
- The distributions were used exclusively to pay or reimburse qualified medical expenses.
- The qualified medical expenses had not been previously paid or reimbursed from another source, and
- The medical expenses had not been taken as an itemized deduction in any year.
The HSA account owner does not send these records with the tax return, but needs to keep the records with tax records in case of an audit.
Is the HSA account owner restricted to use the HSA funds for his or her medical expenses, or is he or she allowed to use the funds for his or her spouse or dependents?
An account owner is allowed to withdraw funds from the HSA and use funds to pay the qualified medical expenses of the account holder, the account holder’s spouse and any dependents of the account holder. This is true even if, at the time of distribution, the account holder’s spouse or dependents are covered by a non-HDHP.
Must an HSA account owner be reimbursed by the HSA within a certain deadline?
No. An account owner may use the funds in the HSA to reimburse qualified medical expenses that have occurred in previous years as long as the expenses were incurred after the HSA was established. For example, an account owner could pay for a qualified medical expense from a regular checking account in 2005 and then reimburse himself or herself in 2015 from the HSA.
What happens to my HSA if I die?
If your surviving spouse is your beneficiary, then the HSA will be treated as your surviving spouse’s HSA. Any distributions used for the deceased or surviving spouse’s qualified medical expenses are tax free.
If your beneficiary is not your surviving spouse, then the account ceases to be an HSA, and the fair market value of the HSA as of the date of the HSA owner’s death will be included in the income of the inheriting beneficiary. The inheriting beneficiary is allowed to claim a deduction for the amount of qualified medical expenses incurred by you before the date of your death if the inheriting beneficiary paid such expenses within one year after such date.
If your beneficiary is your estate, then the fair market value of the HSA as of the HSA owner’s death will be included in your gross income of your last tax year. The inheriting beneficiary of the estate is allowed to claim a deduction for the amount of qualified medical expenses incurred by you before the date of your death if the inheriting beneficiary paid such expenses within one year after such date. The inheriting beneficiary is also allowed a deduction for the estate taxes paid because the HSA was included in the estate and the inheriting beneficiary had to pay a portion of the estate.
How do fees affect my HSA?
Set-up fees and monthly fees may be taken out of your HSA and can be treated like a qualified medical expense. These fees are not included in your income, and you do not need to pay income tax on them nor a penalty for a non-qualified distribution. These fees do, however, count against your contribution limit for the year. For example, an account owner who had a maximimum contribution limit for the year of $1000 is not able to contribute $1025 because of a $25 setup fee.
Fees may reduce earnings.
The information provided in this page is not intended to be legal or tax advice. You should consult your attorney or tax advisor for information that relates to your specific circumstances.
Product descriptions herein do not take the place of required disclosures under federal and state regulations. Please contact us for disclosures appropriate to these accounts.