Questions and Answers

A HSA owner may defer HSA distributions to later taxable years to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, an HSA distribution in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be tax free, he/she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source, and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. 

Example: An eligible individual contributes $1,000 to an HSA in 2006. On December 1, 2006, the individual incurs a $1,500 qualified medical expense and has an HSA balance of $1,025. On January 3, 2007, the individual contributes another $1,000 to the HSA, bringing the balance to $2,025. In June, 2007, the individual takes a $1,500 HSA distribution to reimburse him for the $1,500 medical expense incurred in 2006. If the individual can show that the $1,500 HSA distribution in 2007 is reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed, and has not been taken as an itemized deduction, the distribution is tax free.