6 Common HSA Mistakes

So you just signed up for a Health Savings Account (HSA) and are preparing to pay for your first medical purchase. Before you request payment, make sure you are not committing one of these common HSA mistakes. These HSA mistakes can potentially subject you to a 20% early withdrawal penalty.

1. Purchasing Non-Eligible Medical Supplies

While many medical expenses qualify for HSA reimbursement, the 2011 Affordable Care Act legislation now requires a prescription for over-the-counter medication to avoid the 20% tax penalty.

This means you can no longer be reimbursed for common medication (with an active ingredient) that is sold on any grocery store shelf unless you have a prescription.

If you want to buy Tylenol, Claritin, Benadryl, etc., you need a prescription to be reimbursed from your HSA account without penalty.

You still can continue to buy thousands of other items such as bandages, contact lens solution, first aid supplies, and other accessories with your HSA contributions.

2. Paying a Medical Bill Early

Any medical visit is full of paperwork. You normally receive documents from your insurance provider & the medical office in the following weeks of a doctor visit or procedure. If you are one to pay your bills the second they arrive in your mailbox, you might pay too soon.

You can avoid this common HSA mistake by waiting to receive an Explanation of Benefits (EOB) from your insurance company. This will tell you exactly how much you owe.

By paying too much, you will need to contribute the reimbursement to your HSA to avoid the tax penalty.

3. Confusing Your HSA Debit Card with Your Actual Debit Card

Believe it or not, this is one of the most common HSA mistakes.

Your HSA debit card has the same look & feel as all the other credit and debit cards in your wallet. It functions the same in checkout aisles too. Even the ones that don’t sell medical supplies.

When you are in a hurry or distracted by screaming children, it can be real easy to grab the first plastic card you touch. If you don’t catch the error in time, your accidental purchases will be considered an early withdrawal and you will need to pay the 20% tax.

As soon as you realize you made the mistake, try correcting the error before the end of the current tax year as the IRS allows you fix “mistaken distributions” without penalty. Although, it will take some time & explaining.

To avoid this mistake, keep the card separate from your wallet.

4. Thinking Your Contributions Expire

If you have the option between an HSA & an FSA (Flexible Savings Account), choose the HSA. This is because the funds never expire.

It can be real easy to get confused with the “acronym soup” of our medical fields. Unlike most other tax advantaged medical savings accounts you have probably heard of (i.e. Medical IRA, MSAs, FSAs, HRAs), most of the plans have a “use it or lose it” policy for your annual contributions.

For example, if you contribute $1,000 this year to an FSA, you must spend it all by the end of the year or you forfeit the remaining balance. Assuming you have $95 remaining in your HSA when New Year’s arrives, that money rolls into the upcoming year(s) because it never expires.

5. Contributing Too Much Each Year

Just like you can only contribute up to $5,500 annually for a Traditional or Roth IRA, HSAs have contribution limits too.

For 2017, individuals may contribute up to $3,400 & families can contribute up to $6,750. Those 55 or older can make an additional $1,000 “catch-up” contribution.

If you contribute too much this year, you have until the Federal income tax filing deadline (April 15) to submit an “Excess Contribution Removal Form” to your HSA Plan Administrator.

Otherwise, all excess contributions are subject to a 6% tax penalty.

6. Not Contributing Enough

A final common HSA mistake is not contributing enough money to your HSA. If you have an employer-sponsored HSA, you might think the only way to fund the account is with pretax salary deferrals from January 1 to December 31.

In reality, you can send a check from your personal bank account before the Federal tax filing deadline (April 15) to count the contribution for last year. It’s the same thing as funding a retirement IRA. From January 1 to April 15 of each year you have the option to count the contribution for 1 of 2 years (i.e. 2017 or 2018).

Remember that you can contribute up to $3,400 or $6,750 depending on your tax filing status. Since the money never expires it can be a great place to deposit your Christmas bonus or excess savings after your year-end bills have been paid.

Just make sure you make the extra contributions before you file your taxes to get full pretax contribution credit. Or, you can always submit an amended tax return (Form 1040X).


These are the 6 most common HSA mistakes. Thankfully, you  do have the opportunity to correct many of them if you catch the mistake in time. HSAs are an excellent way to save money on healthcare because all contributions are 100% tax-free when used for medical expenses. By familiarizing yourself for qualifying medical expenses & knowing the annual contribution limits, you shouldn’t be hit with any surprise tax bills.

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