Understanding Qualified Expenses:

Once you have your health savings account in place, you will need to be aware of what your account deems as a "qualified medical expense." This term is used to define what you will be able to use your savings account funds for, tax-free, and what will be subject to a tax penalty if it is not included in the list of qualified medical expenses.

Health savings accounts use IRS Code 213(d) as the standard for qualified medical expenses. You can also find a partial list of qualified medical expenses at the IRS website. Publication #502 contains more information and is available as a downloadable pdf file.

The IRS defines a qualified medical expense as:

"Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include dental expenses.

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract."

Let's take a look at three main areas to better understand what is meant by a "qualified expense."

Health Insurance Costs

You may use your health savings account to pay for your health insurance premiums without taxation on this amount. You will need to provide receipts and proof of the amount that you paid on your taxes when you file each year. This is limited to health insurance premiums only, and your other insurance premiums will not qualify for tax-exempt status.

Your medical plan deductible is also eligible for tax-free payment. Other insurance plans, such as long-term care premiums may also be eligible, if the insurance policy is tax-qualified. If you are unsure if your health insurance expenditures will be tax free, you may consult your health savings account administrator.

Health Care Needs

Your health savings account can also be used to pay for several of your health care needs, while still offering you tax-free benefits for your expenditures. The amount of health care that is covered may differ, but here are some general examples:

Doctor visits, procedures, diagnostic tests that are covered by your current health care plan and dental or vision care. These expenses are limited to what your doctor prescribes or what your health insurance plan deems medically necessary.

For example, if your doctor prescribes x-rays for a condition, this would be considered a qualified medical expense. If you decide that you need x-rays and your doctor does not agree or recommend them, they would not be considered as a qualified medical expense.

Dental and vision care is typically covered, so long as it is not cosmetic in nature. For example, if you want to have your teeth whitened, this procedure would not qualify as a necessary medical expense and you would not be able to pay for it with your health savings account tax-free.

Prescriptions and Supplies

This is an area that has been welcomed the most when it comes to health savings accounts. If your doctor has prescribed a medication, or a treatment, or specific supplies for your condition, they are generally considered a qualified medical expense.

There are some restrictions to this, and it is a good idea to check with your plan administrator if you are uncertain if something will qualify. Generally speaking, you may use your health savings account to purchase a prescription or an over-the-counter medicine if your doctor has deemed it medically necessary.

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