Get Ready for Changes to the List of Eligible Health Savings Accounts Expenses

Health Savings Accounts (HSAs) can be an important health care planning tool for those with health care plans with high deductibles. Funds can be deposited into an HSA tax-free and used to pay for out-of-pocket medical expenses not covered by your health care plan.

Understanding which medical expenses are eligible can be confusing to even sophisticated participants. Knowing the difference between eligible and ineligible expenses is important as HSA withdrawals for non-eligible medical expenses incurs not only income taxes but a 10% penalty (which will increase to 20% starting in 2011).

Recently, my clients have been asking about the proposed changes to eligible HSA expenses that will come into effect on January 1, 2011. Here is a list of the most common eligible expenses that you will likely incur and the impact of the upcoming changes:

Dental Expenses

Dentist fees including those for check ups, preventative cleanings, restorative work, and crowns are eligible. Also, the cost of orthodontics or other dental hardware are included. Most teeth whitening and other cosmetic dental treatments would not be eligible.

Co-pays

Payments that you have to make in order to obtain coverage for medical expenses under your health care plan can be withdrawn from your HSA tax-free. For example, if you have to pay 20% of doctor visits to get the other 80% covered, you can use your HSA for the co-pay portion.

Drugs and Medications

Until December 31, 2010, you can use your HSA funds for most drugs and medications, whether prescription or over-the-counter. Over-the-counter drugs would include aspirin, cold medications, and antihistamines. As of January 1, 2011, you will be able to claim all prescription-only drugs but will only be able to claim over-the-counter drugs if your doctor has written a prescription for them (even if you don't require a prescription to purchase them). Insulin is excluded from the prescription requirement.

Eye Care Expenses

Optometrist fees, eye exams and glasses and contact lenses are covered under HSA rules. Corrective laser surgery fees are also eligible.

Chiropractic Costs

The cost of chiropractor visits is covered, including examination, treatment and X-rays.
Other alternative health care treatments may not be covered, including massage therapy sessions unless there is a doctor's diagnosis letter recommending the therapy for an existing condition.

Ineligible Expenses

Common medical costs that are not eligible under an HSA plan include:

- cosmetic surgery
- health insurance premiums (except for COBRA)
- weight loss programs
- gym memberships
- advance payments for future treatments

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