Health Savings Accounts: Withdrawals

Note for Employers: Health Savings Accounts (HSAs) are becoming a more common part of average Americans’ lives. Paired with HSA-qualified health plans, they cover a growing number of Americans’ health care costs and play an important role in their future.

This post is one of several that will appear in the coming months to help your employees understand HSAs better and use them strategically. The posts are excerpts from “HSA Owner’s Manual, Second Edition” by Todd Berkley (published by Tate Publishing, 2015). Todd Berkley is Senior Vice President and Managing Director for BenefitWallet®, A Xerox Solution.

Withdrawals from a Health Savings Account (the IRS calls them “distributions”) are tax free as long as they are used for eligible expenses, are incurred by individuals eligible for tax-free withdrawals from your HSA, and are incurred during an eligible time period. This post will look at the details of HSA withdrawals.

Eligible Individuals

You do not have to be HSA-eligible to receive tax-free withdrawals from your HSA. HSA eligibility impacts only your ability to establish and contribute to the HSA – you can reimburse eligible expenses tax-free from your HSA at any point in the future after you establish your HSA, as long as you have balances remaining in your HSA.

"Even if you are a saver, with no intention of reimbursing expenses prior to retirement, be sure to save receipts for all eligible expenses you did not reimburse." Todd Berkley, Senior Vice president and Managing Direector, BenefitWallet.
“Even if you are a saver, with no intention of reimbursing expenses prior to retirement, be sure to save receipts for all eligible expenses you did not reimburse.” Todd Berkley, Senior Vice president and Managing Direector, BenefitWallet.

You can make tax-free withdrawals for other individuals’ eligible expenses, as long as those individuals meet the federal tax code definition of your spouse or your tax dependent at the time the expense is incurred. You cannot reimburse tax-free expenses incurred by individuals covered on your insurance policy if they are not your legal spouse or tax dependent.

A spouse or tax dependents do not have to be HSA-eligible themselves or covered on your health insurance plan for you to reimburse their eligible expenses tax-free from your HSA.

Eligible Expenses

There is no authoritative list of HSA-eligible expenses. As a rule of thumb, any expense that diagnoses or treats an illness, injury, or condition is eligible for tax-free distribution from an HSA.

Health insurance premiums are an HSA-eligible expense only if an individual is collecting public unemployment benefits or continuing coverage under the provisions of COBRA.

Medicare premiums are an eligible expense but only if the account holder has turned age 65.

Premiums paid for a qualified long-term care insurance policy are an eligible expense, as long as the policy meets IRS qualification standards – including guaranteed renewability, no cash surrender value, and restrictions on refunds and dividends.


You do not have to reimburse an expense in the year that you incur it. You can defer reimbursement for years. As long as you retain receipts, you can reimburse an expense, tax-free, years (even decades) in the future. Of course, if you want to reimburse an expense immediately and enjoy the tax savings now, you can do so. On the other hand, if you want to build your HSA balance for future expenses, you can pay for eligible expenses with personal (after-tax) funds and allow your HSA balances to grow.

You can make tax-free withdrawals to reimburse any expense that you incur after you establish your HSA. The date you establish your HSA varies according to the state law that governs your HSA, so be sure to check with your HSA trustee.

You cannot make a tax-free payment for your own or an eligible family member’s Medicare premiums until you turn age 65. You can, however, reimburse tax-free other eligible expenses incurred by a qualified family member enrolled in Medicare.

Other Aspects of Withdrawals

If you make a withdrawal from your HSA in error, you are permitted to return the funds. Contact your HSA trustee and follow its process for reversing a mistaken withdrawal.

Your trustee is not required to accept repayment of mistaken withdrawals. In most cases, though, trustees have developed simple processes to allow you to replace any funds that you withdrew by accident.

Trustees cannot restrict your withdrawals to eligible expenses. They can place restrictions on the frequency or amount of withdrawals, but few do. They are generally designed to prevent fraud in the cases they are applied.

If your trustee’s HSA debit card restricts acceptance by merchant code, your trustee must provide an alternate means of making withdrawals. Typical alternatives include a checkbook, an “Online Bill Pay”, or a procedure to link your personal financial account to your HSA and move money as you wish between accounts.


  • Be sure to keep receipts. You’ll need them in case you are audited. Furthermore, if you are preserving your HSA balance for future use (such as in retirement), keeping your receipts for unreimbursed eligible expenses allows you to make a large distribution to meet a sudden financial emergency (or if you want to buy a boat) without tax consequences so long as you can offset the distribution with unreimbursed eligible expenses.
  • Make sure you understand the rules surrounding tax-free withdrawals.
  • Even if you are a saver, with no intention of reimbursing expenses prior to retirement, be sure to save receipts for all eligible expenses you did not reimburse.

The author is not a lawyer and this article does not constitute legal advice. For more detailed information, consult the HSA Owners’ Manual by Todd Berkley.


2 thoughts on “Health Savings Accounts: Withdrawals

  1. Pete Joachim August 26, 2016 - Reply

    HSAs are a nice concept but again, its all about wages. The average family doesn’t have the means (wages) to save for retirement (401k), college (529), pay regular household bills AND create a post-retirement medical IRA with their employer mandated HSA (which is more of means for the employer to save premium costs which are passed on to the employee). Most families will deplete their HSA every year in order to pay out-of-pocket expenses, resulting in little growth in their HSA. So, in reality, those with the most WAGES get to take the most advantage of tax-free (not even tax-deferred) product. And we wonder why we have growing wealth & health inequality.

    • Todd Berkley August 31, 2016 - Reply

      Mr. Joachim, thank you for sharing your thoughts. I agree that HSAs can be challenging for lower income account holders, if improperly executed as you describe. Fortunately, most employers choose to pass on much of the premium savings to employees through lower employee health plan premiums; employer-paid HSA fees; and employer contributions to the account.

      In fact, the most recent Kaiser Family Foundation/HRET survey shows average premium savings of more than $2,500 per employee with an HSA. This gives account holders ample savings to handle potential out-of-pocket expenses rather than sending that money to the insurance company in the form of higher premiums.

      It’s important to remember that one of the biggest advantages of an HSA is its flexibility. Depending on a consumer’s needs and situation, they have the choice to either save, spend or invest the funds in their account. So, even if the account holder spends their HSA funds every year, they still receive a tax savings of up to 30%, depending on their tax bracket.

      Finally, in some instances, the money an employer contributes – and the premium savings an employee can redirect to their HSA – creates the first savings account a lower-paid employee has ever owned. This can be very empowering, especially when they realize they can take the money in their account with them if they leave their employer.

      Thankfully, the situation you describe is the exception, not the rule, when it comes to HSAs.


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