8837 / How are amounts distributed from HSAs taxed?
If a distribution from an HSA is used exclusively to pay the qualified medical expenses of an account holder, the distributed amount is not includable in gross income.1 In contrast, any distribution from an HSA that is not used exclusively to pay qualified medical expenses of an account holder must be included in the account holder’s gross income.2
In addition, a penalty tax applies to any distribution that is includable in income because it was not used to pay qualified medical expenses.3 The penalty tax is 20 percent of includable income for a distribution from an HSA.4 For distributions made prior to January 1, 2011, the additional tax on nonqualified distributions from HSAs was 10 percent of includable income.5
The penalty tax does not apply to includable distributions received after an HSA holder becomes disabled within the meaning of IRC Section 72(m)(7), dies, or reaches the age of Medicare eligibility.6