Receipts and recordkeeping: Little-known HSA requirements (2024)

With tax season in full swing, your employees may be sifting through shoeboxes full of receipts in an attempt to identify and organize qualified health savings account (HSA) expenses as part of their 2022 tax filing. But the more likely scenario is they’re completely unaware of the need to verify HSA purchases.

The ability to reduce taxable income and tax liability – regardless of whether an employee funds the account upfront or as needed for reimbursem*nts – makes HSAs attractive to millions of Americans every year. However, because the HSA is so flexible and easy to use, people often forget (or aren’t aware) there are a few important rules to follow. Now is the time for human resources teams to remind employees about these rules so they can maximize their tax savings and protect themselves in the event of an audit.

Understanding the value – and the complexities – of HSAs

It’s important for employees to understand HSAs are a valuable resource for managing current medical expenses, while also planning for future needs. Employees can save 30% or more (depending on their tax bracket) when they use pre-tax healthcare dollars to pay for qualified expenses like doctor visits and durable medical equipment, over-the-counter pain relief, allergy medication and much more. Even if an employee had no funds in their HSA at the time they incurred the expense, they can retroactively fund and reimburse themselves for expenses.

Despite their popularity, however, there are some little-known requirements that your employees need to understand if your organization offers an HSA or a qualified high-deductible health plan.

• Account holders are responsible for verifying eligibility of purchases. Unlike the flexible spending account (FSA), which doesn’t allow the user to purchase goods or services that aren’t eligible for reimbursem*nt, an employee could literally purchase anything with their HSA dollars. (Though they could end up with a tax bill or penalty if they do so.) Point employees to a comprehensive, searchable eligibility list to ensure they don’t get into hot water by making non-compliant purchases.
• Account holders should save receipts to prove eligibility, in the event of an audit. Because HSA administrators don’t track the purchases employees make with their HSA, employees should make it a habit to save receipts for all HSA-eligible goods and services, so they can easily reimburse themselves when they are ready, or when they need the money. And while the receipt tracking requirement may seem like a burden to employees, it’s important to help your team understand the importance of this and provide tips for how to make tracking expenses a healthy habit.
• HSA reimbursem*nts need matching receipts. When using an HSA debit card, retain receipts for each transaction as those expenses will be reported to the IRS, and you could be audited. When paying out of pocket for healthcare expenses, employees can reimburse themselves from the HSA at any time – so encourage them to save receipts, as they will need documentation of expenses to match reimbursem*nts. For example, an employee can reimburse themself in 2022 for an expense incurred in 2010, as long as they have the receipt from 2010.

Security, in the event of an IRS audit

The ultimate reason to encourage accurate HSA recordkeeping is to help employees avoid a potentially significant penalty should the IRS decide to audit their tax return. Should this happen, accurate documentation of HSA purchases is critical, given that account holders can face a 20% penalty on any HSA purchases for which they cannot prove eligibility, in addition to paying income tax on the amount of the reimbursem*nt. Because a tax return remains open for seven years after it was filed, it’s important to keep HSA purchase records for at least that long.

Fortunately, employers and benefits teams can help employees avoid this situation by educating them on these simple practices.

• When in doubt, spreadsheet it out. Create a spreadsheet template that employees can adopt to track how much they spent on their HSA, how much they contributed, and how much they have left in the account. Include multiple tabs for each year the account is active.
• Use online tracking tools. Direct employees to online resources like this free expense dashboard that will help them track expenses and organize them by the month and year the expenses were incurred. This makes tracking and organizing expenses easy and allows users to print expense reports for specific time periods or plan years.
• Back it up. Unfortunately, in real life, stuff happens. For that reason, it’s good to back up those digital files with a physical copy of expense tracking spreadsheets, online reports and receipts in the event that one or the other gets destroyed.

The triple-tax advantage of the HSA allows employees to reduce their taxable income, pay no tax when requesting reimbursem*nt, meanwhile, the money in the account grows tax-free. This makes the HSA a powerful financial asset and healthcare tool for your employees. But with that power comes the responsibility to maintain an accurate, accessible record of expenses. And that responsibility falls to your employees. By increasing awareness and understanding of these rules among your workforce, you can improve account utilization and satisfaction with the valuable benefits that you offer.