Health Savings Accounts (HSA) can be used to pay for HSA qualified medical expenses, even if the expense is not covered by the high-deductible health plan. HSA funds can also be used to cover the costs of qualified expenses of out-of-network service providers, without having to obtain prior approval from your health insurance company.
What exactly is an HSA qualified medical expense? Qualified expenses are medical expenses allowed as tax deductions by Section 213(d) of the Internal Revenue Code. These are explained in IRS Publication 502, “Medical and Dental Expenses.”
Remember, HSA participants are responsible for their decisions as to what can or cannot be paid for with their HSAs. Therefore, they should familiarize themselves with qualified medical expenses and also keep receipts in case they have to defend some expenditures or decisions during an audit.
Identifying HSA Qualified Medical Expenses
The list of HSA qualified medical expenses is exhaustive; therefore, we will discuss only the most common. This inventory is important, because these are costs often overlooked as medical expenses and, therefore, tax savings.
Alcoholism and Drug Addiction
HSA participants can include in medical expenses amounts paid for an inpatient treatment at a therapeutic center for alcohol addiction. This includes meals and lodging provided by the center during treatment. They can also include amounts paid for transportation to and from Alcoholics Anonymous meetings in the community if the attendance is pursuant to medical advice that membership is necessary to treat a disease involving the excessive use of alcoholic liquors.
Medical Equipment and Capital Expenses
HSA participants can include in medical expenses amounts they pay for special equipment installed in their homes or for improvements if their main purpose is medical care. The cost of permanent improvements that increase the value of real property may be partly included. The cost of the improvement is reduced by the increase in the value of the property, and the remainder will be considered a medical expense.
If the value of the property is not increased by the improvement, the entire cost is included as a medical expense. Certain improvements made to accommodate a home, for example, due to a disability, do not usually increase the value of the home, and the entire cost can be considered a qualified medical expense.
Such HSA qualified improvements include, but are not limited to, the following:
- constructing entrance or exit ramps;
- widening doorways at entrances or exits;
- modifying areas in the front of entrance and exit doorways;
- widening or otherwise modifying hallways and interior doorways;
- installing railings, support bars, and other modifications to bathrooms;
- lowering or modifying kitchen cabinets and equipment;
- moving or modifying electrical outlets and fixtures;
- installing porch lifts and other forms of lifts (elevators are generally deemed to add value to the house);
- modifying fire alarms, smoke detectors, and other warning systems;
- modifying stairways;
- adding handrails or grab bars anywhere;
- modifying hardware on doors; and
- grading the ground to provide access to the residence.
Durable medical equipment, such as crutches, wheelchairs, hospital beds, walkers, oxygen equipment, bath and shower chairs, drug infusion devices, abdominal supports, and feeding pumps, is considered a qualified medical expense.
Dental treatment—for example, X-rays, fillings, braces, extractions, and dentures—is included as a HSA qualified medical expense.
Hearing and Vision Related Expenses
Participants who are visually impaired can include the part of the cost of Braille books and magazines that is more than the cost of regular printed editions. Prescription eyeglasses or contact lenses, laser eye surgery, and guide dogs for the blind or deaf are qualified medical expenses. Qualified medical expenses include the costs of buying, training, and maintaining a guide dog or other animal to assist persons who are visually impaired, hearing impaired, or have other physical disabilities.
Hearing aids and telephone equipment for the hearing impaired are also included. Medical expenses include the cost of special telephone equipment that lets a hearing impaired person communicate over a regular telephone. This includes teletypewriter (TTY) and telecommunications device for the deaf (TDD) equipment. Also included is the cost of repairing the equipment.
The cost of insulin is a HSA qualified medical expense.
HSA and Health Insurance Premiums
HSA funds can be used to pay for premiums for certain types of health insurance plans. These include
- a health plan during any period of continuation coverage required under any federal law, for example, COBRA coverage;
- a health plan during a period in which the individual is receiving unemployment compensation under any federal or state law;
- premiums for Medicare Part A, B, or D, or a Medicare Advantage plan (for individuals over age 65);
- a qualified long-term care insurance contract. Note, however, that the amount of an LTC insurance premium that is allowed as a qualified medical expense is limited.
Long Term Care Expenses
Qualified HSA medical expenses include not only qualified long-term care insurance premiums but also qualified long-term care services if the services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, or rehabilitative services, or maintenance and personal care services required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health-care practitioner.
An individual is chronically ill if, within the previous 12 months, a licensed health-care practitioner has certified that the individual meets either of the following descriptions:
- He or she is unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) without substantial assistance for at least 90 days due to a loss of functional capacity.
- He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Maintenance and personal care services is care with a primary purpose of providing a chronically ill individual with needed assistance with disability.
Mental Health Care
Psychiatric care is a qualified medical expense, as is treatment by a psychoanalyst or a psychologist.
Included as medical expenses are wages and other amounts paid for nursing services. The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided at home or in a care facility.
Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, amounts paid to the attendant must be divided between the time spent performing household and personal services and the time spent for nursing services.
However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses.
Also included is part of the amount paid for the attendant’s meals. The food expense is divided among the household members to find the cost of the attendant’s food. If additional amounts for household upkeep are generated from the attendant, then these can be included as well. This includes extra rent for utilities or having to move to a larger apartment to provide space for the attendant.
Over-the-Counter Drugs- NOT An HSA Qualified Medical Expense
Over-the-counter drugs are no longer qualified expenses for HSA purposes. The definition of “medical expenses” in the context of qualifying for tax-free distributions from HSAs was revised as a result of the Health Care Reform Act to include expenses for drugs only if the drug is a prescription drug, insulin, or doctor-prescribed over-the-counter medicine. This new rule is effective for expenses incurred January 1, 2011, and later.
All prescription drugs are considered qualified medical expenses, even those not normally covered by insurance (birth control pills, for example). If a prescribed drug is purchased and consumed in another country and if the drug is legal in both the other country and the United States, the cost is considered a qualified medical expense.
Artificial teeth, limbs, orthotics, and other prosthetic devices are includible as qualified medical expenses.
Medical expenses include fees paid to doctors, dentists, surgeons, osteopaths, chiropractors, psychiatrists, psychologists, and Christian Science practitioners. Also included are payments for hospital services, qualified long-term care services, nursing services, ambulance services, and laboratory fees. Payments for acupuncture treatments are also included, as are most so-called alternative treatments and methods of care.
Smoking Cessation Programs
HSA participants may include amounts paid for participating in a smoking cessation program and for drugs prescribed to alleviate nicotine withdrawal.
Qualified medical expenses are fees paid on a doctor’s recommendation for a child’s tutoring by a teacher who is specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments, including nervous system disorders.
Any expenses paid for medical care received on account of being a donor or a possible donor of a kidney or other organ are a qualified medical expense, as are any expenses paid for the medical care of a donor in connection with the donation of an organ. This includes necessary transportation.
HSA participants may consider the cost of transportation as a qualified medical expense when such transportation is primarily used for and essential to medical care. The actual fare for a taxi, bus, train, or ambulance can be counted. For those who use their own cars for medical transportation, actual out-of-pocket expenses such as gas and oil can be counted, or the standard mileage rate for medical expenses can be taken. With either method, tolls and parking fees may be included.
In addition, the incidental cost of meals and lodging charged by a hospital or similar institution may be paid from an HSA account if the main reason for being there is to receive medical care.
Weight Loss Programs
The cost of participating in a weight loss program for a specific disease or diseases, such as obesity, hypertension, or heart disease, when diagnosed by a physician is a qualified medical expense. This includes fees paid for membership in a weight reduction group and attendance at periodic meetings.
Not qualified are books on weight loss. Also not qualified are membership dues for a gym, health club, or spa, but these can be included as separate fees when charged there for weight loss activities.
The cost of special food is included in medical expenses only if the food does not satisfy normal nutritional needs, the food alleviates or treats an illness, and the need for the food is substantiated by a physician. The amount includible is limited to the amount by which the cost of the special food exceeds the cost of a normal diet.
Non Qualified HSA Medical Expenses
The following are generally not considered qualified medical expenses and would not qualify for payment with HSA funds:
- funeral or burial expenses
- health club dues
- toiletries and cosmetics
- a trip or program for the general improvement of health
- maternity clothes
- most cosmetic surgery, including hair transplants and teeth whitening procedures
- prescribed drugs brought in or ordered and shipped from another country (though drugs that can be imported legally are includible)
- nutritional supplements
And finally, with the exceptions noted earlier, health insurance generally may not be purchased with HSA funds.
Employers with questions about HSA qualified medical expenses or are considering adding an HSA option, please feel free to contact us, your San Francisco benefit specialists.