What Happens If You Use Your HSA/FSA Card on Something Ineligible?

‍Our Experts

• Jane Gachucha, CFE, Certified Fraud Examiner
• Fran Scott, Director of Compliance, HealthEquity

Tapping away with your HSA card almost seems too easy, but what happens if you realize a few weeks later that a purchase may not have been a qualified medical expense? 

"The biggest mistake I see is people treating the HSA like a general wellness account," says Jane Gachucha, CFE. "It is a medical expense account with very specific rules." And Fran Scott, Director of Compliance at HealthEquity, agrees. "The biggest misconception is that if something supports your health, it automatically qualifies," she says. "In reality, eligibility is often based on whether the expense is qualified medical care, not general wellness."

It’s an honest mistake that plenty of people make. Here’s how it plays out depending on whether you have an HSA or an FSA, and what you can do about it.

If You Have an HSA: Taxes and Penalties

With an HSA, you own the account and your administrator processes transactions without checking whether each purchase is actually eligible. This makes things easy, and is one of the perks of an HSA, but it also means the responsibility falls entirely on you to make sure you're making the right calls on your purchases.

If you use your HSA card on something ineligible, the IRS treats it as a taxable distribution, so you’ll owe income tax on that amount, plus a 20% penalty if you’re under 65. "If you accidentally use your HSA card on a $100 ineligible item and you are in the 22% tax bracket, you owe $22 in income tax plus a $20 penalty. That $100 purchase just cost you $142," explains Gachucha.

This doesn’t hit you right away, though. Your HSA administrator reports the distribution on Form 1099-SA, and you report it as taxable income on Form 8889 when you file your taxes, so the real consequences will show up at tax time.

If You Have an FSA: Substantiation and Card Freezes

FSAs work differently because your employer owns the account and the administrator actively monitors what you're buying. When you swipe your FSA card, an auto-substantiation check runs in the background, Gachucha explains. If the purchase matches a known eligible expense, it's approved automatically, but if it doesn't, you'll get a substantiation request within a few days asking you to prove the purchase was legit.

You typically have 30 to 90 days to submit an itemized receipt showing the date, provider, description, and amount. A credit card or bank statement won't cut it, says Gachucha.

If you can’t provide the documentation, your card gets frozen and the amount is recovered through payroll deduction. Repeated issues can mean that your card gets permanently revoked.

"I tell people to treat their FSA like it is under surveillance, because it essentially is," says Gachucha. "I personally scan every eligible purchase using my phone and store it as a PDF in a labeled folder. If and when a request for documentation comes in, it takes minutes to respond."

While it can seem a bit like 'big brother' is watching, there is a benefit to this because FSAs catch problems early, so there’s no IRS penalty involved. "FSA accounts have training wheels built in. HSAs give you total freedom, and that means total responsibility," says Gachucha.

How to Fix an Ineligible HSA Purchase

If you catch the mistake before you file your taxes, then you're good to go. The easiest way to deal with it is to return the ineligible amount to your HSA as a mistaken distribution, says Gachucha. Contact your HSA administrator and ask how to process it. Most will code it correctly so it doesn't show up as taxable income.

If you've already filed, you'll need to submit an amended return using Form 1040-X along with a corrected Form 8889, which means more paperwork, but it's still fixable. Gachucha recommends keeping records of everything, including saving the receipt, documentation of the repayment, and a short note explaining what happened.

Honest Mistakes vs. Audit Red Flags

One accidental swipe is not going to land you in hot water. "The IRS looks for patterns, not one-off mistakes," says Gachucha. A single honest mistake is a one time thing that's ideally corrected quickly, and backed up with documentation.

Audit red flags look different, like a bunch of purchases at grocery stores or gas stations with no obvious medical reason, round-number withdrawals with no receipts, or using your HSA card at places like Target or Costco without any documentation to show which items were actually eligible.

"Here is the test I give people from my audit experience," says Gachucha. "If an IRS auditor looked at your HSA transaction history with no context, would it clearly look like medical expenses?"

How to Avoid the Problem in the First Place

The best way to get around all of this is to check eligibility before you buy something. "Someone sees a product labeled ‘HSA eligible’ and assumes they are good to go," says Gachucha. "But that label means the product category can qualify. It does not mean your specific purchase qualifies automatically."

If you’re not sure whether something counts, Gachucha recommends paying out of pocket first and researching it after. If it qualifies, reimburse yourself later with proper documentation so you don't have to worry about the risk of using your HSA funds incorrectly.

For purchases that don’t automatically qualify, like fitness equipment, supplements, or recovery tools, you might need a Letter of Medical Necessity (LMN) from your doctor. Scott is clear that an LMN needs to be in place before you purchase, as it can’t work retroactively. For a full rundown of what qualifies, check IRS Publication 502.

Spend Smarter, Stress Less

Your HSA and FSA are super useful for covering health costs by using your pre-tax dollars. A little bit of homework before you buy something will save you from paperwork headaches or feeling like you're in trouble with law. Learn more about how HSAs and FSAs work, how to use Truemed to streamline eligibility on the blog, and to check out HSA/FSA-eligible products, head over to the Stridekick Shop.