Any distribution used to pay for a qualified medical expense from a Health Savings Account are excluded from your taxable gross income. Any distribution from an HSA not used for a qualified medical expense are included in gross income and subject to an additional 10% tax unless individual is over 65.
The bank holding your HSA funds has absolutely no involvement in matters of determining eligible expenses and qualified distributions. It is the account holder’s responsibility to determine what medical expenses are eligible to be funded by the HSA. In case the IRS ever wants to review your use of HSA funds, you should keep records of your health care expenses.
HSA Distributions after Death
If the Health Savings Account (HSA) owner dies, the HSA becomes the property of the named beneficiary. If the spouse is the beneficiary, the HSA can continue and the surviving spouse is subject to income tax only on HSA distributions not used for qualified medical expenses. If the HSA passes to a person other than the spouse, the HSA terminates as of the date of death, and the beneficiary is required to include the HSA assets in gross income. The taxable amount is reduced by any HSA payments for the decedent’s qualified medical expenses, if paid within one year after death.
Penalty for Non-Qualified Distributions
Distributions not used for qualified medical expenses are includable in gross income and, for applicants under age 65, subject to an additional 10% tax.