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Eligible medical expenses that can be paid for with tax-free HSA withdrawals.

In order to qualify for tax-free status, withdrawals from a health savings account must be used to pay medically-related expenses that meet the definition set forth in Section 213 (d) of the Internal Rev. Code. Section 213(d) provides two lists, both of which are reproduced below. Essentially, these are broken down into deductible and non-deductible medical expenses. Ordinarily, this list is used to determine whether any particular medical expense qualifies for a deduction when medical expenses are itemized on your tax return ("Schedule D"). The same list, however, is also used to determine which expenses are eligible for tax-free status when paid for with withdrawals from a health savings account.

By now, you may have noticed that yes, indeed, the HSA allows people to effectively by-pass the AGI threshold amount of medical expenses that must be incurred before a medical expense is allowed as an itemzed deduction. The "catch" with itemizing medical deductions, of course, is that no deduction is allowed unless qualified medical expenses total at least 7.5% of AGI (adjusted gross income). Needless to say, people in higher income brackets often have difficulty meeting this threshold. Unlike the itemized medical deduction, however, the deduction for contributions to a health savings account is taken "above the line," and is, therefore, made available without regard to A) whether you itemize any deductions, or B) whether you incur enough medical expenses to qualify for the medical expenses itemzed deduction (which is generally limited to 7.5% of AGI). This facet - little known as it seems to be - is one of the (few) legitimate reasons why it can be stated that health savings accounts benefit the "wealthy" taxpayers, because it essentially creates a deduction where none would otherwise be available for medical expenses incurred.

As it so happens, this was the topic of a special report I prepared while a graduate student, working toward my Master's in Financial & Tax Planning at San Diego State University. A powerpoint presentation is available on this site that details this concept. Please click here for the HSA powerpoint presentation. (You can learn more about my educational background and professional experience by clicking on the link called "about us.")

About HSA-qualified insurance quotes. Our apologies, but for spacing purposes on this page, we deleted the graphic that makes it easy for you to get quotes for high deductible HSA insurance plans through our agency. So here is a quick link to Get HSA Insurance Quotes (new browser opens so you can stay on this page). Please remember, all of these technical nuances are meaningless if the premiums for a new high deductible plan are not attractive enough to you, or if you are unable to obtain an acceptable offer of coverage due to health-related issues. So please consider getting some quotes for the required high deductible plans, sooner rather than later. In fact, I recommend obtaining HSA insurance quotes before digging through all of the HSA-related technical details.

Here is the list of qualified medical expenses. In general, you may withdraw funds from your health savings account on a tax-free basis to pay for any of the expenses listed as "deductible" or "eligible." And in case you're wondering whether you can use tax-free HSA dollars to pay for your health insurance premiums, the answer is found directly beneath this chart.

Medical Expenses that are deductible and/or eligible for tax-free withdrawals from a health savings account

Non-Deductible Expenses (not eligible for tax-free HSA withdrawals)

• abdominal supports

• abortion

• acupuncture

• air conditioner (when necessary for relief from an allergy or for relief from difficulty in breathing)

• alcoholism treatment

• ambulance

• anesthetist

• arch supports

• artificial limbs

• autoette (when used for relief of sickness/disability)

• birth control pills (by prescription)

• blood tests

• blood transfusions

• braces

• cardiographs

• chiropractor

• Christian Science Practitioner

• contact lenses

• contraceptive devices (by prescription)

• convalescent home (for medical treatment only)

• crutches

• dental treatment

• dental x-rays

• dentures

• dermatologist

• diagnostic fees

• diathermy

• drug addiction therapy

• drugs (prescription only)

• elastic hosiery (prescription)

• eyeglasses

• fees paid to health institute prescribed by a doctor

• FICA and FUTA tax paid for medical care service

• fluoridation unit

• guide dog

• gum treatment

• gynecologist

• healing services

• hearing aids and batteries

• hospital bills

• hydrotherapy

• insulin treatments

• lab tests

• lead paint removal

• legal fees

• lodging (away from home for outpatient care)

• metabolism tests

• neurologist

• nursing (including board and meals)

• obstetrician

• operating room costs

• ophthalmologist

• optician

• optometrist

• oral surgery

• organ transplant (including donor’s expenses)

• orthopedic shoes

• orthopedist

• osteopath

• oxygen and oxygen

equipment

• pediatrician

• physician

• physiotherapist

• podiatrist

• postnatal treatments

• practical nurse for medical services

• prenatal care

• prescription medicines

• psychiatrist

• psychoanalyst

• psychologist

• psychotherapy

• radium therapy

• registered nurse

• special school costs for the handicapped

• spinal fluid test

• splints

• sterilization

• surgeon

• telephone or TV equipment to assist the hard-of-hearing

• therapy equipment

• transportation expenses (relative to health care)

• ultra-violet ray treatment

• vaccines

• vasectomy

• vitamins (only if prescribed)

• wheelchair

• x-rays

• advance payment for services to be rendered next year

• athletic club membership

• automobile insurance premium allocable to medical coverage

• boarding school fees

• bottled water

• commuting expenses of a disabled person

• cosmetic surgery and procedures

• cosmetics, hygiene products and similar items

• diaper service

• domestic help

• funeral, cremation or burial expenses

• health programs offered by resort hotels, health clubs, and gyms

• illegal operations and treatments

• illegally procured drugs

• maternity clothes

• nonprescription medication

• premiums for life insurance, income protection, disability, loss of limbs, sight or similar benefits

• Scientology counseling

• social activities

• special foods or beverages

• specially designed car for the handicapped other than an autoette or special equipment

• stop-smoking programs

• swimming pool

• travel for general health improvement

• tuition and travel expenses a problem child to a particular school

• weight loss programs (subject to change under new IRS guidelines)

 

Of note: HSA funds may not be used, at least on a tax-free basis, to pay for health insurance premiums. There are four notable exceptions. HSA funds may be used to pay for:

  1. a health plan during any period of continuation coverage required under any federal law (i.e. COBRA, etc.),
  2. a qualified long-term care insurance contract, and
  3. a health plan during a period in which the individual is receiving unemployment compensation under any federal or state law.
  4. Medicare premiums (this is a relatively new recognized expense and a *great* reason to fund an HSA prior to retirement, so you can use tax-free dollars to pay Medicare premiums on Part A and Part B).

For more detailed information, please consult IRS Publication 502 entitled, “Medical and Dental Expenses” for the most up-to-date list of eligible expenses. (See page entitled "Other HSA Info" on one of our other pages for convenient links to IRS publications.)