Doctor's Note May Not Be Enough To Justify All HSA Expenses, IRS Warns

A Health Savings Account (HSA) is designed to help Americans with their medical expenditure by providing tax benefits. While maxing a HSA contributions can significantly lower the tax bill, spending on non-eligible items can land taxpayers in a world of hurt. There are certain expenses that the IRS may challenge even if the consumers produce a doctor’s note to justify them, according to an official release.  Here’s a guide on how to use funds from a HSA without getting into trouble.

What is HSA and how does it save tax?

A health savings account is essentially a personal savings account dedicated to only medical expenses. To be eligible for HSA, citizens must enroll in a high-deductible health plan (HDHP). Furthermore, people who have enrolled in Medicare will no longer be eligible to make HSA contributions.

The HSA contributions are made with pretax dollars which means no income tax has to be paid on the money that is put into the HSA.

However, the funds are expensive to access if they are not used properly. In case the IRS finds out that ineligible expenses were paid for using HSA funds, taxpayers below the age of 65 will owe income taxes on that money plus a 20% penalty for the non-qualified expenses.

Since a physician's note may not be enough to make certain products eligible, the IRS has warned taxpayers that some marketing campaigns misrepresent what is eligible under an HSA.

What are the Non-eligible HSA expenses?

Expenses on food and wellness are hardly considered HSA-eligible. Even food suggested by a dietitian or a doctor for special diets may draw scrutiny from the IRS. The same goes for wellness items, such as fitness trackers and gym memberships. However, this hasn’t stopped some companies from claiming that doctor’s notes based on self-reported health information can convert these into eligible medical expenses, the IRS said in an official release.

“Taxpayers should be careful to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don’t qualify as medical expenses,” said IRS commissioner, Danny Werfel in the release.

Further, according to the IRS’ warning, only the expenses that are related to a “targeted diagnosis-specific treatment” will fall under the HSA-eligible expenses.

Consumers are advised to spend the HSA fund only on the eligible products to avoid scrutiny from the IRS. However, taxpayers may seek an LMN from doctors by visiting them in person for the healthcare requirements. As per a Kiplinger report, things like a gym membership may be eligible if the doctor has recommended it to treat hypertension. Similarly, doctors may write an LMN for a fitness tracker for patients who suffer from obesity, the report added.

Will Misuse of HSA Funds Trigger an Audit?

While the IRS doesn’t monitor how taxpayers choose to spend their HSA funds throughout the year, they may ask for proof to determine if the expenses were eligible. Thus if a person’s tax return contains unrelated IRS audit red flags, they might be at risk of an HSA audit, the Kiplinger report said.

Rules for an HSA after turning 65

For the HSA holders who are 65 or older, they can use the HSA funds even for non-eligible expenses or anything else without paying the 20% penalty. However, the distributions for non-HSA-eligible expenses will still be subject to ordinary income tax.