How to keep your HSA records in order
Health savings accounts come with a great deal of flexibility and freedom. But with flexibility and freedom comes responsibility. And when it comes to HSAs, it’s ultimately up to you to make sure you keep track of your HSA spending, ensuring that all expenses are HSA-qualified expenses and that you have appropriate records. If you don’t, you may end up paying income tax plus a 20% IRS penalty on any expenses deemed ineligible—whether because you broke the rules or just didn’t have the right records.
So, the first step of keeping your HSA records in order comes before you even make any payments out of your HSA. Before anything, you need to understand exactly what “qualified medical expenses” are as they pertain to HSAs—especially after the CARES Act coronavirus relief bill became law on March 27, 2020. Remember, you can use your HSA funds for a wide variety of eligible expenses—from office visits and surgical charges, to prescription drugs, vision and dental care and more. And through the CARES Act, you can now also use your HSA funds for telehealth and virtual healthcare services, over-the-counter medical products and more.
But there are a number ineligible HSA expenses as well, like aromatherapy, athletic mouth guards, baby bottles, cosmetic surgery purely for cosmetic reasons and more. You can find the complete, current list of qualified medical expenses for HSAs in IRS Publication 502. Just be aware, this IRS publications hasn’t been updated to include the CARES Act changes. You can learn more about those important updates on our blog.
Once you’ve educated yourself on what you can and can’t use your HSA funds for, the next step of HSA recordkeeping is just that—maintaining record of all your HSA receipts, invoices, statements and other important documents related to your account. Make sure you keep record of every single charge and HSA transaction. And when it comes to a time period for recordkeeping, best practice is to keep your HSA records for as long as your HSA account is open. Also remember, your annual tax return technically remains open in the eyes of the IRS for around three years after it’s filed—so long story short, even if you close or stop using your HSA, don’t be too quick to toss out all your HSA receipts and records.
When it comes to how you keep your HSA records, the choice is yours. With an HSA platform like Bend HSA, all HSA activity is tracked for you and available on-demand in a convenient “electronic shoebox.” If your HSA provider doesn’t offer automated account and expense tracking, you can choose to organize your records in whichever manner works best for your specific circ*mstance. Popular methods include creating spreadsheets to track your expenses as well as establishing both physical and digital folder structures to keep easy record and reference of your HSA expenses. You can choose to break your recordkeeping up by month, year or whatever interval makes sense for your healthcare spending.
At the end of the day, while it might take a bit of time to get things set up initially, HSA recordkeeping is straightforward and can be a simple process. You just want to be sure that if and when the time comes, you’ll have the proof you need to avoid any issues with the IRS regarding your HSA use.
