Health Savings Account (HSA) distributions are tax-free if they are used to pay qualified medical expenses. The following are some of these medical expenses and include the following:
- Prescription drugs
- Diagnosis, cure, treatment, mitigation, or prevention of disease costs
- Continuation coverage required by federal law
- Qualified long-term care services
- Qualified long-term care insurance
- Health insurance for the unemployed
- Medicare expenses (not Medigap)
- Retiree health expenses for individuals age 65 or older
However, any distributions that are made for any other purpose are taxable and have a 10 percent penalty. This 10 percent penalty is waived for distributions made by individuals age 65 or older