HSA Distribution Rules: Qualified Expenses, Penalties, and Age 65

Money you pull from a Health Savings Account is tax-free only when it pays for a qualified medical expense you incurred after the account was opened. Spend it on anything else before age 65 and the IRS treats the withdrawal as ordinary income and adds a 20% additional tax on top. The HSA distribution rules turn on three things: what you bought, when you bought it, and whether you can prove it. Miss any of the three and a tax-free withdrawal becomes an expensive one.

What Counts as a Qualified Medical Expense

A qualified medical expense is a cost of diagnosing, treating, or preventing a medical condition for you, your spouse, or your dependents. Copayments, deductibles, prescription drugs, dental work, vision care, and mental health services all qualify. The expense must have been incurred after your HSA was established, and that cutoff is absolute. A bill from the week before your account opened cannot be reimbursed tax-free, even if you take the withdrawal years later.¹

Over-the-Counter Items

Since 2020, over-the-counter medications qualify without a prescription. The same change made menstrual care products, including tampons, pads, liners, and cups, eligible for tax-free reimbursement.² Before that, only prescribed medications and insulin counted. Many account holders still spend after-tax dollars on things their HSA now covers.

Insurance Premiums Are Usually Not Qualified

General health insurance premiums are not qualified medical expenses. Your HSA cannot reimburse your monthly premium for an employer plan or a marketplace policy. The IRS carves out only four exceptions:³

COBRA continuation coverage after leaving a job.
Health plan premiums paid while you collect unemployment compensation.
Qualified long-term care insurance, subject to the age-based caps below.
Medicare premiums after age 65, including Parts A, B, D, and Medicare Advantage. Medigap and other Medicare supplement premiums do not qualify.

The Medigap exclusion is where people slip. Part B and Part D premiums come out of the HSA tax-free once you turn 65; a Medigap supplement does not.

Long-Term Care Premium Caps

Qualified long-term care premiums are deductible only up to an annual cap tied to the insured person’s age. For 2026:

Age 40 or under: $500
Age 41 to 50: $930
Age 51 to 60: $1,860
Age 61 to 70: $4,960
Age 71 or older: $6,200

Premium dollars above those limits are not qualified, so paying them from your HSA would create a taxable distribution.

You Can Reimburse Yourself Years Later

There is no deadline for reimbursing yourself from your HSA, as long as the expense was incurred after the account was established. You can pay a $3,000 dental bill out of pocket today, leave your HSA invested for a decade, then withdraw $3,000 tax-free in 2036 to cover that same bill. The IRS imposes no time limit on the withdrawal. The only requirements are that the HSA existed when the expense occurred and that you keep documentation.⁴

That opens a real strategy for anyone who can afford to pay medical bills from a checking account now: let the HSA compound tax-free, then tap it later when the balance is larger. The catch is recordkeeping. If you reimburse yourself for a seven-year-old expense and the IRS asks, you need the original receipt or explanation of benefits. Lose the paperwork and an otherwise tax-free withdrawal becomes taxable.

Non-Qualified Distributions Before Age 65

Withdraw HSA funds for anything other than a qualified medical expense before age 65 and the IRS treats the full amount as ordinary income and adds a 20% additional tax. In the 22% federal bracket, a $1,000 withdrawal for a vacation costs $420: $220 in income tax and $200 in penalty. That combination makes early non-qualified distributions one of the costliest moves you can make with a tax-advantaged account.¹

The 20% penalty does not apply in three situations:

Distributions made after the account holder’s death.
Distributions after the account holder becomes permanently disabled.
Distributions taken after the account holder turns 65.

The statute ties the age-65 exception to the age for Medicare eligibility under section 1811 of the Social Security Act.¹ Enrolling in Medicare earlier because of a disability is handled by the separate disability exception.

Fixing a Mistaken Distribution

If you accidentally took a distribution that wasn’t for a qualified expense, you may be able to return the money and avoid both the income tax and the 20% penalty. The IRS allows repayment of a “mistaken distribution” when the withdrawal was made due to a mistake of fact and there is reasonable cause. Custodians are not required to accept the return, but many do.⁵

The repayment deadline is April 15 following the first year you knew or should have known the distribution was a mistake. If the custodian accepts the repayment before that date, the distribution is not included in gross income, is not subject to the 20% additional tax, and is not treated as an excess contribution.⁶ This is a narrow fix for genuine errors, not a way to reverse a change of heart.

How the Rules Change at 65

Turning 65 changes the math. The 20% penalty disappears, so non-qualified distributions are taxed only as ordinary income, similar to withdrawals from a traditional IRA or 401(k). Distributions for qualified medical expenses remain fully tax-free at any age.⁴

After 65 the HSA functions like a flexible retirement account. Non-medical spending costs you income tax but no penalty. Medicare Part B, Part D, Medicare Advantage premiums, prescription drugs, hearing aids, and other medical costs come out tax-free. Because Medicare premiums are often deducted automatically from Social Security, you can withdraw from your HSA to reimburse yourself for premiums you have already paid, effectively converting them into tax-free distributions.⁴ Medigap premiums remain the exception even after 65.

Distributions After the Account Holder’s Death

What happens to the HSA at death depends entirely on who is named as beneficiary.

A surviving spouse simply takes over the account. It becomes their HSA, subject to the same distribution rules, and they can also use it to pay qualified expenses the deceased incurred before death, as long as the expenses arose after the HSA was established.⁴

Anyone else who inherits the HSA is treated very differently. The account stops being an HSA immediately, and the full fair market value becomes taxable income to the beneficiary in the year of death. If the estate is the beneficiary, the value goes on the decedent’s final return. A non-spouse beneficiary can reduce the taxable amount by paying the deceased’s qualified medical expenses within one year of death.⁴

Transfers in Divorce

Transferring an interest in an HSA to a spouse or former spouse under a divorce or separation instrument is not a taxable event. The transferred funds keep their HSA status for the receiving spouse, who can then take distributions under the normal rules. A direct trustee-to-trustee transfer is the cleanest path, since it avoids any gap where the receiving spouse might not yet have an HSA of their own.¹

Reporting Every Distribution

Every HSA distribution generates paperwork, even one that went entirely to qualified expenses.

Your custodian sends Form 1099-SA each year you take a distribution, showing the total amount and a code identifying the type (normal, excess contribution removal, disability, or death).⁵ The form itself does not tell the IRS whether the distribution was qualified. That determination happens on Form 8889.

You must file Form 8889 with your tax return in any year you take a distribution, even if every dollar went to qualified medical expenses and you owe no additional tax. On the form you report total distributions, subtract the portion used for qualified expenses, and calculate any taxable amount and additional tax.⁷ Skipping Form 8889 because your HSA debit card was used at a pharmacy is a common mistake. The custodian reports the gross distribution; you report how it was spent. Those are separate obligations.

Records You Need to Keep

The IRS puts the burden of proof on you, not on your custodian. Most custodians will process a withdrawal without asking for a single receipt, and that convenience is not the same as approval. In an audit, the IRS will ask you to prove each distribution paid a qualified expense. Without that proof, the distribution is reclassified as non-qualified and taxed, with the 20% penalty added if you were under 65.⁴

For every distribution, save documentation showing the date of service, the provider or vendor, the amount charged, and who received the care. Itemized provider receipts and Explanation of Benefits statements are the most reliable records. A credit card statement showing a payment to a medical office helps but usually does not stand on its own, because it identifies neither the service nor the patient.

The IRS generally requires you to keep supporting records until the statute of limitations on the return expires, which for most taxpayers is three years from the filing date, or six years if income was underreported by more than 25%.⁸ HSA records deserve more caution than that. Because you can reimburse yourself for an old expense at any time, a 2026 receipt may need to survive until a 2035 return. Keeping HSA-related receipts indefinitely, ideally as digital copies in a cloud backup, is the safe approach and eliminates the risk of faded paper.

1
Office of the Law Revision Counsel. 26 U.S. Code 223 – Health Savings Accounts
2
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
3
Internal Revenue Service. href=”https://www.irs.gov/publications/p969″ target=”_blank” rel=”noopener”>Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
4
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
5
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
6
Internal Revenue Service. Distributions for Qualified Medical Expenses (Continued)
7
Internal Revenue Service. Instructions for Form 8889
8
Internal Revenue Service. How Long Should I Keep Records