Tax Facts

410 / How are funds accumulated in a Health Savings Account (HSA) taxed prior to distribution?

An HSA generally is exempt from income tax unless it ceases to be an HSA.1

In addition, rules similar to those applicable to individual retirement arrangements (IRAs) regarding the loss of the income tax exemption for an account where an employee engages in a prohibited transaction2 and those regarding the effect of pledging an account as security3 apply to HSAs. Any amounts treated as distributed under these rules will be treated as not used to pay qualified medical expenses ( Q 3649).4

1.     IRC § 223(e)(1).

2.     IRC § 408(e)(2).

3.     IRC § 408(e)(4).

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