Yes. The tax advantages of an HSA apply only when funds are used for qualified medical expenses. If HSA funds are used for non-qualified expenses, the withdrawal may be treated as taxable income and subject to an additional 20% penalty.
There are exceptions. If you become disabled, pass away, or reach age 65, you may use HSA funds for non-medical expenses without the penalty. However, those funds will still be treated as taxable income.
For the full list of qualified medical expenses, you can review IRS Publication 502 or use Lively’s What’s Eligible Tool.
Source: “Revenue Procedure 2003-57: Section 213(d).--Medical, Dental, Etc., Expenses.” Internal Revenue Service. Accessed June 19, 2020. https://www.irs.gov/pub/irs-drop/rr-03-57.pdf.
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