As long as you use the money in your HSA to pay for qualifying medical expenses, you can withdraw the money free of federal income tax, free of federal tax penalties, and free of tax on earnings. Most medical care qualifies, including prescription and over-the-counter drugs, dental, and vision. You can find a partial list of eligible medical expenses at www.ustreasury.org.
For the most part, however, you can’t use your HSA to pay for health insurance premiums — you have to pay for those with ordinary after-tax dollars. There are a few notable exceptions, however. You can use your HSA to pay for these types of premiums:
COBRA coverage, when you leave a job but have the temporary right to continue coverage under your old employer’s plan
Some long-term care insurance policies
Health insurance if you’re over age 65 (not including Medigap policies)
Spending the money
It’s easy to pay with your HSA. You’ll be issued a checkbook, a debit card, or both linked to your account, which you use to pay for qualified medical expenses. You can also use the account to reimburse yourself for cash expenses paid out of pocket.
Because HSAs are so new, doctors and other healthcare providers may not be used to dealing with patients paying with them. One thing you should know is that you’re entitled to the insurer-negotiated price, based on your coverage with your HDHP. However, medical care providers may not be accustomed to giving that price to individuals. So you may need to explain the system to them or have them contact your insurer to verify your right to the lower price.
What qualifies?
The IRS defines qualifying medical and dental expenses in Publication 502, "Medical and Dental Expenses," which you can download on www.irs.gov. It’s worth a look, since you may find some things that qualify as medical expenses you can pay for with your HSA, but that traditional health insurance might not cover.
