Key takeaways
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Qualified medical expenses are deductibles, co-payments, prescriptions, medical equipment, and more that you can pay for tax-free using your Health Savings Account (HSA) funds.
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Not all medical expenses qualify; cosmetic procedures, teeth whitening, and similar expenses are excluded, and spending HSA funds on non-qualified expenses can trigger a tax penalty.
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You're responsible for tracking and documenting your HSA spending; save your receipts in case the Internal Revenue Service (IRS) requests proof.
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Once you turn 65, you can use HSA funds for any purpose without the penalty, though non-qualified expenses will still be subject to income tax.
A health savings account (HSA) is one of the most advantageous ways to save money for the future, including for retirement. Its primary purpose, however, is to help accountholders save and pay for current or future healthcare expenses.
HSAs have three primary tax advantages, but one is conditional. Contributing to an HSA and growing an HSA (through interest and potentially through investing¹) can bring you tax savings², but when you spend your HSA funds, you can only realize tax savings for qualified medical expenses.
What are qualified medical expenses?
Qualified medical expenses are designated by the IRS. They include certain medical, dental, vision and prescription expenses you can pay for with your HSA (or other healthcare savings accounts) funds.
Some of the most common qualifying medical expenses include:
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Deductibles
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Co-payments
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Flu shots
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Dental care
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Vision care
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Hearing aids
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Immunizations
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Physical exams
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Prescription drugs
When you use your HSA funds to pay for qualified medical expenses, you are not taxed on the purchase. This is the third tax advantage of HSAs, and one that can save HSA accountholders hundreds (or even thousands) of dollars over the life of the HSA.
What are non-qualified medical expenses?
It is important to remember that not every medical, dental, vision or prescription expense is considered qualified.
Non-qualifying expenses might include:
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Cosmetic procedures
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Veneers
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Teeth whitening
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Diet foods
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CBD
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Hair growth or removal products
Who has the responsibility to oversee HSA fund purchases?
It is the HSA holder’s responsibility to ensure they are spending their HSA funds on qualified medical expenses. Employers and HSA providers can help with benefits education, but the account holder is in charge of keeping documentation to prove they are spending HSA funds only on qualified medical expenses.
The IRS may ask for proof that HSA funds were spent appropriately³. Account holders should save receipts and keep careful records of how HSA funds are spent in case they are audited. HealthEquity allows members to easily and efficiently upload receipts to their account using the app or member portal.
| Situation | What happens |
|---|---|
| You use HSA funds for qualified medical expenses | You aren’t taxed on the purchase. |
| You use HSA funds for non-qualified medical expenses, or you can’t prove the expense was qualified. | The purchase is subject to tax, and you could be charged an additional 20% tax penalty. |
| You’re 65 or older and use HSA funds for a non-qualified expense. | You’ll pay income taxes, but you won’t pay the 20% percent tax penalty. |
| You’re 65 or older and use HSA funds for qualified medical expenses. | You won’t be taxed. |
If the IRS finds you spent your HSA funds on non-qualified medical expenses - or if you cannot prove the purchase was a qualified medical expense - the purchase will be subject to tax, and you could be charged an additional 20% tax penalty.
There is one exception: If you are age 65 or older, you can use your HSA funds for any purpose⁴. If the expense is a non-qualified medical expense, you will be subject to income taxes, but you will not be subject to the 20% tax penalty. If you spend your HSA funds on qualified medical expenses, you will not be taxed.
What’s the takeaway for benefits administrators?
You don’t need to turn every employee into an IRS expert to make a real difference. Focus on a few practical habits that help them stay compliant and maximize savings:
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Reinforce the definition: tax-free spending depends on qualified medical expenses
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Keep documentation: receipts, letters of medical necessity, and clear records protect employees in an audit
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Share clear examples: call out common “gray areas” like certain cosmetic procedures or products
If you want a simple next step for employees, point them to www.healthequity.com/hsa-qme for more detail on qualified medical expenses.
Frequently asked questions
References and disclosures
¹Investments are subject to risk, including the possible loss of the principal invested and may not be eligible for federal depository insurance by the FDIC or NCUA or guaranteed by HealthEquity. Investing may not be suitable for everyone and before making any investments, review the fund's prospectus.
²HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state's specific rules.
³It is the members' responsibility to ensure eligibility requirements as well as if they are eligible for the expenses submitted.
⁴After age 65, if you withdraw funds for any purpose other than qualified medical expenses, you will be subject to income taxes. Funds withdrawn for qualified medical expenses will remain tax-free.
Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.
