Part 6: The Hidden Traps in HSA Withdrawals — And How Form 8889 Protects You

The Hidden Traps in HSA Withdrawals — And How Form 8889 Protects You

Most taxpayers focus on HSA contributions — but the real IRS scrutiny begins when you start taking money out.
Every withdrawal must be properly documented, every reimbursement must match an eligible expense, and every dollar must be tracked on Form 8889 to avoid taxes and penalties.

1️⃣ How HSA Withdrawals Actually Work

HSA distributions are tax-free if used for qualified medical expenses for:

• You
• Your spouse
• Your dependents (even if not claimed on your return)

You do not need to submit receipts to the IRS, but you must keep them indefinitely in case of audit.
You may withdraw funds:

• At the time of the medical expense
• Or many years later, as long as you have proper documentation

2️⃣ What Counts as a Qualified Medical Expense?

A qualified medical expense must meet the IRS definition: primarily to diagnose, treat, mitigate, cure, or prevent a physical or mental condition.
Eligible expenses generally match IRS Publication 502 (medical deductions), with some exceptions.

Examples of qualified expenses:

• Doctor visits & specialist care
• Prescription medications
• Hospital services
• Dental & vision care
• Mental health services
• Physical therapy & chiropractic treatment
• Medical equipment (CPAP, crutches, insulin supplies)

3️⃣ Timing Rules — Immediate or Years Later

One of the biggest advantages of HSAs is flexible timing.
You can:

• Pay the provider directly with your HSA card, or
• Pay out-of-pocket now and reimburse yourself years later

As long as the expense was incurred after your HSA was opened and you maintain proper documentation, reimbursement can be delayed indefinitely.

4️⃣ Form 8889 — How to Report Contributions & Withdrawals

Form 8889 is required every year you or your employer contributed to your HSA or you took a distribution.
The form reports:

• Part I — HSA contributions (yours + employer’s)
• Part II — HSA distributions & whether they were used for qualified expenses

Your HSA custodian will send Form 1099-SA reporting all withdrawals.
You must match those withdrawals against your qualified expenses and report the total on Form 8889.

5️⃣ Non-Qualified Withdrawals & Penalties

A withdrawal is non-qualified if you cannot match it to a legitimate medical expense.

Penalties:

• Taxable as ordinary income
• 20% penalty (unless age 65+, disabled, or deceased)

6️⃣ Real-Life Examples (Correct vs Incorrect)

💬 Frequently Asked Questions