Careful adherence to IRS rules for Health Savings Accounts (HSAs) is crucial to avoid tax penalties and complications. Failure to follow these rules can result in hefty penalties, tax complications, and potentially costly IRS audits, underscoring the importance of proper HSA management.
Cat Torres explained that if HSA funds are used for expenses that do not meet the IRS definition of “qualified medical expenses,” the account holder will face a penalty of up to 20% of the withdrawal amount. She warned that HSA holders need to be mindful of their contributions to avoid exceeding the annual limit. If HSA funds are withdrawn for more than the actual medical expense, the excess money should be returned to the HSA within the same tax year to avoid penalties, Cat shared. Proper documentation of such corrections is important.
“There are remedies, so you want to stay on top of it. You can always put the money back and document that you're putting it back because it’s a mistake.”
Interested in learning more? Check out the full Financial Planning article here.
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