J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

41.12 Distributions From HSAs

Distributions from an HSA used exclusively to pay or reimburse qualified medical expenses of the account owner, his or her spouse, or dependents are not taxable. Distributions used for anything other than qualified medical expenses are taxable. Taxable distributions are also subject to a 20% penalty unless the distribution is made after the account owner becomes disabled, reaches age 65, or dies.

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Caution

IRS Can Levy on HSAs

The IRS can levy on an HSA to recover taxed owed. If the HSA owner is under age 65, there is a 20% penalty (there is no exception from this penalty for an involuntary distribution such as an IRS levy).

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Distributions need not be taken in the year in which the expense is incurred to be tax free; they can be taken in the following year or in any later year. This may be necessary if there are insufficient funds to cover the expense at the time it is incurred. For example, an HSA account holder who incurs a $1,500 medical expense on December 1, 2012, can wait until 2013 (or later) when the account balance exceeds $1,500. The distribution is tax free so long as records are kept to show that the distribution was used to reimburse qualified medical expenses that were not covered by insurance or otherwise reimbursed and not claimed in a prior year as an itemized deduction. The HSA must have ...