HSA accounts are designated to cover your medical expenses. Can you use it for non-medical purposes? Yes, of course -- it's your money. However, per IRS guidelines, if you are under 65 years old, you will have to pay ordinary income taxes as well as pay a 20% penalty for the amount you disbursed out of your HSA account to an ineligible expense. If you are 65 or older, disabled, or deceased, then you will just pay regular income taxes (no penalty) if you purchase an ineligible service.
What should you do if you accidentally use your HSA funds for an ineligible service/item? For example, you use your HSA card in a pharmacy, but the register takes the card for your OTC medicine and.... a bag of chips?
To avoid the penalty, here is what you can do:
Fill out the Contributions Form, download it HERE
a. Please ensure that the "Return of Mistaken Distribution" section is completed by checking the tax year of the ineligible expense.
b. Enclose a check made payable to "WealthCare Saver FBO (Accountholder Name) HSA" in the amount specified below and include your HSA account number on your check.
c. Reach out to email@example.com to help you follow up with the bank
d. The 5498-SA Tax form will be updated with the correction
Or, you will need to report the amount on Line 16 of Form 8889 as a Taxable HSA Distribution and might need to pay for the penalty.
Please note that HSA is a self-managed account, so all your transactions at the accepted merchant will be approved automatically. You are required to do a self-report if you purchase any ineligible items or services.