Publication 969 - Health Savings Accounts And Other Tax-Favored Health Plans

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You withdraw any income earned on the withdrawn

explained in Publication 502, Medical and Dental Ex-

contributions and include the earnings in “Other in-

penses. However, even though non-prescription

come” on your tax return for the year you withdraw

medicines (other than insulin) do not qualify for the medical

the contributions and earnings.

and dental expenses deduction, they do qualify as ex-

penses for HSA purposes.

If you fail to remain an eligible individual during

Note. After 2010, non-prescription medicines (other

any of the testing periods, discussed earlier, the

than insulin) do not qualify as an expense for HSA pur-

amount you have to include in income is not an

CAUTION

poses. See the discussion under What’s New for 2011,

excess contribution. If you withdraw any of those amounts,

earlier.

the amount is treated the same as any other distribution

For HSA purposes, expenses incurred before you es-

from an HSA, discussed later.

tablish your HSA are not qualified medical expenses. State

law determines when an HSA is established. An HSA that

Deducting an excess contribution in a later year. You

is funded by amounts rolled over from an Archer MSA or

may be able to deduct excess contributions for previous

another HSA is established on the date the prior account

years that are still in your HSA. The excess contribution

was established.

you can deduct for the current year is the lesser of the

If, under the last-month rule, you are considered to be

following two amounts.

an eligible individual for the entire year for determining the

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Your maximum HSA contribution limit for the year

contribution amount, only those expenses incurred after

minus any amounts contributed to your HSA for the

you actually establish your HSA are qualified medical ex-

year.

penses.

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Qualified medical expenses are those incurred by the

The total excess contributions in your HSA at the

following persons.

beginning of the year.

1. You and your spouse.

Amounts contributed for the year include contributions

by you, your employer, and any other person. They also

2. All dependents you claim on your tax return.

include any qualified HSA funding distribution made to

3. Any person you could have claimed as a dependent

your HSA. Any excess contribution remaining at the end of

on your return except that:

a tax year is subject to the additional tax. See Form 5329.

a. The person filed a joint return,

Distributions From an HSA

b. The person had gross income of $3,650 or more,

You will generally pay medical expenses during the year

without being reimbursed by your HDHP until you reach

c. You, or your spouse if filing jointly, could be

the annual deductible for the plan. When you pay medical

claimed as a dependent on someone else’s 2010

expenses during the year that are not reimbursed by your

return.

HDHP, you can ask the trustee of your HSA to send you a

distribution from your HSA.

For this purpose, a child of parents that are di-

You can receive tax-free distributions from your HSA to

vorced, separated, or living apart for the last 6

TIP

pay or be reimbursed for qualified medical expenses you

months of the calendar year is treated as the

incur after you establish the HSA. If you receive distribu-

dependent of both parents whether or not the custodial

tions for other reasons, the amount you withdraw will be

parent releases the claim to the child’s exemption.

subject to income tax and may be subject to an additional

10% tax. You do not have to make distributions from your

You cannot deduct qualified medical expenses as

HSA each year.

an itemized deduction on Schedule A (Form

1040) that are equal to the tax-free distribution

If you are no longer an eligible individual, you can

CAUTION

from your HSA.

still receive tax-free distributions to pay or reim-

TIP

burse your qualified medical expenses.

Insurance premiums. You cannot treat insurance pre-

Generally, a distribution is money you get from your

miums as qualified medical expenses unless the premi-

health savings account. Your total distributions include

ums are for:

amounts paid with a debit card that restricts payments to

1. Long-term care insurance.

health care and amounts withdrawn from the HSA by other

individuals that you have designated. The trustee will re-

2. Health care continuation coverage (such as cover-

port any distribution to you and the IRS on Form 1099-SA,

age under COBRA).

Distributions From an HSA, Archer MSA, or Medicare

3. Health care coverage while receiving unemployment

Advantage MSA.

compensation under federal or state law.

Qualified medical expenses. Qualified medical ex-

4. Medicare and other health care coverage if you were

penses are those expenses that would generally qualify for

65 or older (other than premiums for a Medicare

the medical and dental expenses deduction. These are

supplemental policy, such as Medigap).

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Publication 969 (2010)

Publication 969 - Health Savings Accounts And Other Tax-Favored Health Plans - 2010 Page 8

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