Massachusetts Health & Accident Insurance Practice Exam

What happens if HSA funds are used improperly?

1. No penalty is incurred

2. A 10% penalty is charged

3. A 20% penalty is charged

4. The account is immediately closed

The correct answer is: A 20% penalty is charged

When Health Savings Account (HSA) funds are used for non-qualified expenses, a penalty is applied. Specifically, a 20% penalty is incurred on the amount that was used improperly, which is a significant deterrent to improper withdrawals. Additionally, the improper use of these funds also results in the distribution being taxed as ordinary income. This structure serves to encourage account holders to utilize HSAs appropriately for qualified medical expenses, which can include deductibles, copayments, and other eligible health-related costs. Understanding the consequences of misuse, including this steep penalty, is crucial for HSA account holders to navigate their benefits effectively. Thus, the implications of improper use highlight the importance of adhering to the rules surrounding HSA fund usage.