The penalty for non-medical HSA withdrawals

If you withdraw money from your Health Savings Account for something that is not a may have access to medical expense, you owe income tax on that amount plus a 20% penalty. The penalty applies to the withdrawal itself, not to your overall account balance. So if you take out $500 for a non-medical expense, you pay income tax on $500 and an additional $100 penalty to the IRS.

The income tax rate depends on your tax bracket — it is whatever rate you pay on your ordinary income. A person in the 22% federal tax bracket who withdraws $500 for a non-medical expense would owe roughly $110 in federal income tax plus the $100 penalty, for a total of about $210. State income tax may apply on top of that, depending on where you live.

You report the withdrawal and penalty on your tax return when you file. The IRS does not automatically know about non-medical withdrawals unless your HSA provider reports them, which most do on Form 1099-SA. If you made a mistake — spent the money thinking it was may have access to when it was not — you can still correct it by redepositing the funds before tax time, though this does not erase the penalty if the IRS has already flagged the account.

Key Takeaways

  • Non-medical HSA withdrawals trigger both income tax at your regular rate and a 20% penalty on the amount withdrawn.
  • The penalty is separate from income tax, so a $500 non-medical withdrawal costs roughly $110 to $150 in combined federal tax and penalty, plus any state tax.
  • Your HSA provider reports withdrawals to the IRS on Form 1099-SA, so the IRS will see non-medical spending.
  • Redepositing the money before you file taxes may reduce your tax burden, though the penalty still applies if the IRS has already identified the withdrawal.
  • After age 65, the income tax penalty goes away but you still owe income tax on non-medical withdrawals.

How the IRS defines a may have access to medical expense

The IRS maintains a specific list of what counts as a may have access to medical expense for HSA purposes. The expense must be for diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatment affecting any part or function of the body. This includes doctor visits, prescription medications, dental work, vision care, and mental health treatment.

Some expenses that feel medical but do not may have access to include cosmetic procedures (unless they treat an injury or disease), over-the-counter medications without a prescription, gym memberships, vitamins, and most wellness products. Teeth whitening is not covered, but root canals are. Hair loss treatment is not covered unless it is treating a diagnosed medical condition like alopecia. The line is often whether the expense treats a disease or condition versus promoting general wellness.

You can find the IRS's full list of may have access to expenses in Publication 502. If you are unsure whether something qualifies, your HSA provider's website usually has a searchable database, or you can contact them directly. Keeping receipts and documentation is important because the IRS can audit HSA withdrawals years after they happen.

When the 20% penalty does not apply

The 20% penalty disappears once you turn 65, even though you still owe income tax on non-medical withdrawals. At that point, an HSA functions like a traditional IRA — you can withdraw money for any reason, but non-medical withdrawals are taxed as ordinary income. This is one reason HSAs become more flexible in retirement.

The penalty also does not apply if you are disabled or have received a information of disability from the Social Security Administration. In that case, non-medical withdrawals are still taxable income, but the 20% penalty is waived. You will need to provide documentation of your disability status to your HSA provider.

If you are the beneficiary of someone's HSA after they die, different rules apply. The person who inherits the account can withdraw funds without the penalty, though they will owe income tax on non-medical withdrawals depending on their relationship to the account holder.

Correcting a mistake before tax time

If you realize you made a non-medical withdrawal, you can put the money back into your HSA before you file your tax return. This is called a redeposit or correction. When you redeposit, you are essentially undoing the withdrawal from a tax perspective, which means the IRS will not see it as a taxable event.

The catch is timing: you must redeposit before you file your tax return for that year. If you withdrew the money in 2024, you have until the tax filing deadline in 2025 (usually April 15) to put it back. Your HSA provider can walk you through the redeposit process, which is usually straightforward — you just transfer the money back in and notify them that it is a correction.

Redepositing does not erase a penalty if the IRS has already identified the withdrawal through an audit or if your provider has already reported it. But if you catch the mistake early and correct it before filing, you avoid both the tax and the penalty.

How HSA providers report withdrawals to the IRS

Your HSA provider sends Form 1099-SA to both you and the IRS each year. This form shows the total amount you withdrew from the account. It does not break down whether each withdrawal was medical or non-medical — that distinction is your responsibility to track and report on your tax return.

When you file taxes, you report non-medical withdrawals on Form 8889 (Health Savings Accounts). This is where you tell the IRS which withdrawals were not for may have access to expenses and calculate the 20% penalty. If you do not report a non-medical withdrawal and the IRS discovers it during an audit, you will owe the tax, the penalty, and potentially interest and additional penalties for underreporting.

Keeping your own records of what you spent HSA money on is essential. Save receipts, explanation of benefits statements, and any documentation that shows whether an expense was medical. The IRS can audit HSA accounts for up to three years after you file, so holding onto records for at least that long is wise.

The difference between HSA penalties and other account mistakes

The 20% penalty for non-medical withdrawals is different from other HSA violations. If you over-contribute to your HSA — put in more than the annual limit allows — you owe a 6% excise tax on the excess amount each year it stays in the account. That is a separate penalty from the non-medical withdrawal penalty.

If you are no longer covered by a high-deductible health plan, you can still withdraw money from your HSA, but any non-medical withdrawals are subject to the 20% penalty (unless you are over 65 or disabled). Losing coverage does not change the rules about what counts as a may have access to expense.

Some people confuse HSA penalties with Flexible Spending Account (FSA) rules. FSAs have a "use it or lose it" rule where unspent money goes back to your employer at the end of the year. HSAs do not have this rule — money rolls over indefinitely, which is why the penalty structure is different.

Frequently Asked Questions

Can I get the penalty waived if I made an honest mistake?

The IRS does not automatically waive the 20% penalty for honest mistakes, but you can request relief if you have reasonable cause. This requires filing Form 8889 correctly and potentially submitting a written explanation to the IRS. The best approach is to redeposit the money before filing your tax return, which avoids the penalty altogether.

What if I spent HSA money on something and I am not sure if it qualifies?

Check Publication 502 or your HSA provider's may have access to expense list. If it is borderline, contact your provider before you file taxes — they can tell you whether the IRS would consider it may have access to. If you are still unsure after that, it is safer to report it as non-medical and pay the tax and penalty rather than guess wrong and face an audit.

Do I have to report every single HSA withdrawal on my tax return?

No. You only report non-medical withdrawals on Form 8889. Medical withdrawals do not need to be itemized or reported individually — your HSA provider's 1099-SA shows the total, and you report only the portion that was non-medical. Keep your own records to back up which withdrawals were medical.

What happens if the IRS audits my HSA account?

The IRS will ask you to provide documentation that your withdrawals were for may have access to medical expenses. Receipts, invoices, and explanation of benefits statements are the best proof. If you cannot document that a withdrawal was medical, you will owe income tax and the 20% penalty, plus interest on the unpaid tax from the year of the withdrawal.

Can I withdraw HSA money to pay for my spouse's medical expenses?

Yes. HSA money can be used for may have access to medical expenses of you, your spouse, and your dependents, regardless of whether they are covered by your health insurance. The expense still has to be may have access to — it is not just about who receives the care.