Are HSA Reimbursements Taxable? Qualified Expenses and Age 65 Rules

HSA reimbursements are not taxable at the federal level when you use the money for qualified medical expenses incurred after you opened the account. Those withdrawals come out tax-free no matter how much time has passed between paying the bill and reimbursing yourself. Pull money out for anything else and the rules flip: the full amount is added to your taxable income, and if you are under 65 the IRS tacks on an additional 20% penalty.¹

When a Reimbursement Comes Out Tax-Free

A distribution is excluded from your gross income if it pays for, or reimburses you for, a qualified medical expense.² Two conditions attach to that rule. The expense must have been incurred after the date you established the HSA; costs from before the account existed never qualify.³ And you had to be covered by a qualifying high-deductible health plan during any period you were making contributions.

There is no deadline for reimbursing yourself. If you paid a medical bill out of pocket five years ago and want to pull that same amount out of your HSA today, the withdrawal is still tax-free, provided the expense happened after the account was opened and you have the receipts.² Some account holders use this deliberately, paying medical costs from other funds and letting the HSA balance grow before reimbursing themselves years later.

What Counts as a Qualified Medical Expense

The IRS defines qualified medical expenses as costs for diagnosing, treating, or preventing disease, and for treatments affecting any structure or function of the body.⁴ In practice, this covers doctor and hospital visits, prescription drugs, dental work, vision care, mental health services, medical equipment, and physical therapy.⁵ Since 2020, over-the-counter medications and menstrual care products also qualify without a prescription.⁶

Expenses that are merely beneficial to general health do not qualify. Vitamins, gym memberships, and cosmetic procedures that don’t treat a medical condition all fall outside the definition.⁵ IRS Publication 502 carries an alphabetical list of specific items and services when a particular expense is unclear.

Health Insurance Premiums Are Usually Not Qualified

Most health insurance premiums cannot be paid with HSA funds without triggering tax. The IRS allows only four categories:

COBRA continuation coverage.
Coverage paid for while you are receiving unemployment compensation.
Medicare premiums if you are 65 or older, covering Part A, Part B, Part D, and Medicare Advantage. Medigap policies are not included.
Qualified long-term care insurance premiums, within age-based limits.

Using HSA funds to pay premiums outside these four buckets makes the withdrawal non-qualified.²

What Happens If You Withdraw for Something Else

A non-qualified withdrawal is added in full to your gross income for the year of the distribution.¹ You owe federal income tax on that amount at your ordinary rate, which ranges from 10% to 37%.⁷

If you are under 65, an additional 20% tax applies to the non-qualified portion.¹ That is twice the 10% early-withdrawal penalty on traditional IRAs.⁸ A $5,000 withdrawal for a vacation, taken by someone in the 22% bracket, would cost $1,100 in income tax plus a $1,000 penalty, for a $2,100 total hit.

The 20% penalty is waived in three situations: the account holder is 65 or older, is disabled, or has died and the distribution goes to a beneficiary.² Regular income tax on the non-medical amount still applies in each case.

How the Rules Change at Age 65

At 65, the 20% penalty on non-qualified withdrawals goes away permanently.¹ Qualified medical withdrawals remain fully tax-free. Non-medical withdrawals are simply taxed as ordinary income, the same way a traditional IRA distribution would be. A retiree pulling $2,000 out for a personal expense would owe income tax at their current bracket and nothing more.

One catch at 65: enrolling in any part of Medicare ends your ability to make new HSA contributions. Your existing balance continues to work normally, and you can use it tax-free for Medicare Part A, Part B, Part D, and Medicare Advantage premiums, though not for Medigap.²

Fixing a Mistaken Withdrawal

If you pull money out for a non-qualified purpose by accident, you can return it and undo the tax consequences. The IRS allows you to repay a mistaken distribution to your HSA no later than April 15 of the year after you knew or should have known about the mistake.⁹ Meet that deadline and the distribution stays out of your gross income, no 20% penalty applies, and the repayment is not treated as an excess contribution.

To do this, contact your HSA custodian and ask for a mistaken distribution return form. You’ll typically provide the amount, the original withdrawal date, and a signed statement explaining the error. The custodian issues a corrected Form 1099-SA reflecting the return.

Reporting and Records

Your HSA custodian reports every distribution to the IRS on Form 1099-SA, and you should receive your copy by early February.⁹ The form shows the total for the year but does not sort qualified from non-qualified. That part is on you.

You report the split on Form 8889, attached to your Form 1040. If you took any distribution during the year, filing Form 8889 is required even when nothing is taxable.³ Total distributions go on one line, the portion used for qualified medical expenses on another, and the difference flows to your return as taxable income.

In an audit, the burden is on you to prove each distribution paid for a qualified expense. The IRS’s baseline expectation is that you keep records for three years from the date you filed the return reporting the distribution.¹⁰ Because you can reimburse yourself for old expenses at any point in the future, keeping medical receipts indefinitely is the safer approach if you plan to use that strategy. Each receipt should show the date of service, the provider, the nature of the expense, and what you paid.

State Taxes May Not Follow the Federal Rules

Everything above concerns federal income tax. Most states mirror the federal treatment and leave qualified HSA distributions alone, but a few do not conform. California does not recognize the federal HSA tax deduction, and contributions, investment earnings, and distributions can all be subject to state income tax there.¹¹ New Jersey also taxes HSA contributions and earnings at the state level. In a non-conforming state, a reimbursement that costs nothing federally may still generate a state tax line to work through.

1
Office of the Law Revision Counsel. 26 USC 223 Health Savings Accounts
2
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
3
Internal Revenue Service. Instructions for Form 8889 (2025)
4
eCFR. 26 CFR 1.213-1 Medical, Dental, etc., Expenses
5
Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
6
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
7
Internal Revenue Service. Federal Income Tax Rates and Brackets
8
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
9
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
10
Internal Revenue Service. How Long Should I Keep Records
11
California Franchise Tax Board. Health Savings Account Deduction Conformity