The IRS requires that you keep receipts for all your Health Savings Account (HSA) spending. HSA distributions (money taken from an HSA account) are nontaxable, but only when the money is used to pay for qualified medical expenses.
Good recordkeeping avoids future tax headaches. Essentially, any money that comes out of your HSA must have a receipt showing it was for an eligible medical expense. You may face a 20% penalty on any distribution that you cannot prove was for a qualified medical expense.
The only time you don't need a receipt showing the distribution was for an eligible medical expense is when you rollover funds into another HSA. In this case, the distribution is accounted for on your tax return.
The IRS Provides this Guidance:
You must keep records sufficient to show that:
Do not send these records with your tax return. Keep them with your tax records.
- The distributions were exclusively to pay or reimburse qualified medical expenses,
- The qualified medical expenses had not been previously paid or reimbursed from another source, and
- The medical expenses had not been taken as an itemized deduction in any year.
For reference, see IRS Publication 969 (Health Savings Accounts > Deemed Distributions from an HSA, under "Recordkeeping")
Follow These Steps
- Keep records of all HSA documentation for as long as your income tax return is considered “open” (subject to an audit), or as long as you maintain the account, whichever is longer.
- Hold on to any insurance carrier’s Explanation of Benefits (EOB) statement that documents your expenses for services covered under your HDHP.
- Keep receipts for all other items purchased with your HSA, for example, vision and dental services.
To simplify recordkeeping, electronic records are acceptable.
There's No Time Limit for Reimbursing Yourself
- As long as you had an HSA when you incurred the qualified medical expense, you can reimburse yourself at any time.
- It makes no difference how much time has passed.
- Even if you're no longer on a HSA-eligible health plan, you can still spend money from your HSA. (You can always spend your HSA dollars. You just can't contribute to your HSA if your plan isn't eligible).
Think about this for a minute. You could pay your qualified medical expenses out of pocket, save your receipts, and reimburse your future self in a large lump sum. Withdraw the money, tax free, and spend it on...anything. Think big! A down payment on a home? A trip of a lifetime?
For reference, see IRS Publication 969 (Health Savings Accounts > Distributions from an HSA)