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How to avoid hardship withdrawal penalties
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1. Contributions, earnings, and distributions are tax-free for federal tax purposes when used to pay for qualified medical expenses. Each state may decide to follow the federal tax guidelines for HSAs or establish its own. As of the publication date (9/15/2020), only California and New Jersey tax eligible contributions to HSAs. These states regard HSAs as regular taxable brokerage accounts, so residents have to declare any capital gains, interest, and dividends they receive to the state. New Hampshire and Tennessee tax some earnings but not contributions.
2. Under IRS rules, you (and your spouse, if you have family coverage) generally can’t have any health coverage other than an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you aren’t covered by that plan. You can have additional insurance that provides benefits only for the following items: liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property; a specific disease or illness; a fixed amount per day (or other period) of hospitalization. You can also have coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, and long-term care.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
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