What are "eligible" medical expenses? "Eligible" medical expenses include those commonly thought to be medical expenses such as: doctor visits, prescription drugs, and hospitalization plus some expenses that are not traditionally included with health insurance such as dental and vision care (click here for a more complete listing).

What are the tax rules for other HSA distributions? HSA distributions generally fall into three catagories (1) tax-free and penalty-free, (2) subject to taxes but no penalty, and (3) subject to taxes and penalty.
Tax Free and Penalty Free
   o Eligible Medical Expenses
   o Long-Term Care Insurance
   o COBRA health insurance premiums
   o Health insurance premiums after age 65
   o Medicare premiums for individuals enrolled in Medicare
   o Rollovers and transfers to new HSA
Taxable - No Penalty
   o Made after age 65
   o Death distributions
   o Disability distributions
Taxable and Penalized
Other distributions are taxable and subject to a 10% penalty.

For example: Jim, aged 35, has $4,000 in his HSA and writes a check to himself to pay for a vacation to Europe. In that case, Jim must include the $4,000 as taxable income on his income tax return and pay a penalty of $400 ($4,000 x 10%).

Who determines whether a distribution is qualified? The HSA owner is responsible to determine whether a distribution is qualified. This is another positive aspect of HSAs, unlike Flexible Spending Accounts or Health Care Reimbursement Accounts, no employer review of an individual's personal health care expenses is required.

What sort of documentation is required to track medical expenses? Individuals are in charge of tracking their own expenses, although insurance companies and employers may help. HSA Resources provides a Medical Expense Tracking Worksheet for this purpose. By saving receipts and recording purchases on the Worksheet, an individual should have an excellent foundation in the event of an audit.