Exec Summary - HSA Withdrawals

New Withdrawal Penalty for Health Savings Accounts


Who:         Applicable to any individual policyholder or group plan member with an Health Savings Account (HSA) or Archer Medical Savings Account (MSA).  


 When:      The new increased penalty imposed shall apply to account distributions made after December 31, 2010.



Summary:  The Patient Protection and Affordability Act increases from 10 to 20 percent the penalties for “non-qualified distributions” (withdrawals) from Health Savings Accounts and increases from 15 to 20 percent the penalties for non-qualified distributions (withdrawals) from Archer Medical Savings Accounts.


A non-qualified distribution is any amount of withdrawal not used exclusively to pay for qualified medical expenses of the account beneficiary, spouse or dependents.  Such amount is includable in gross income of the account beneficiary and is subject to an additional 20% tax on the amount, except in the case of distributions made after the account beneficiary's death, disability, or attaining age 65.


The term “qualified medical expenses” are amounts paid by the account beneficiary, his or her spouse or dependents for medical care as defined in IRS section 213(d) but only to the extent the expenses are not covered by insurance or other sources.  The following list includes a few examples of qualified medical expenses:



Alcoholism treatment

Ambulance services

Artificial limb or prosthesis

Artificial teeth

Birth control pills

Braille books/magazines (portion of costs)

Car adaptations (for a person with a disability)


Christian science practitioners

Contact lenses (including saline solution and cleaner)


Dental treatment (x-rays, fillings, extractions, dentures,

braces, etc.)

Diagnostic devices (such as a blood sugar test kit)

Doctor’s fees

Drug addiction treatment

Eyeglasses (including eye examinations)

Eye surgery (including laser eye surgery)

Fertility enhancement (including in-vitro fertilization)

Guide dog (for visually-impaired or hearing-impaired)

Hearing aids and hearing aid batteries

Hospital services (including meals and lodging)


Laboratory fees

Prescription medicines or drugs

Nursing home

Nursing services

Operations or surgery

Psychiatric care


Telephone equipment for hearing-impaired

Telephone equipment for visually-impaired

Therapy or counseling


Transportation for medical care






Required:       Most employers and individual policyholders with HSA eligible plans will want to discuss the new legislation with their insurer, TPA, agent, broker, tax adviser or benefit consultant.   Employers and vendors paying claims may need to inform covered individuals of the potential increased penalties and when they would apply.  Individuals will need to keep records of transactions on funds withdrawn from HSAs or MSAs to satisfy the IRS that the penalties either do or do not apply. Tax penalties are paid on each affected individual’s personal tax return.  


The information presented and contained within this article was submitted by Ronald E. Bachman, President and CEO of Healthcare Visions. This information is general information only, and does not, and is not intended to constitute legal advice. You should consult your legal advisors to determine the laws and regulations impacting your business.