Key Points
- Health savings accounts (HSAs) offer a triple tax advantage: on contributions, growth, and withdrawals.
- Account holders can reimburse themselves years later for past qualifying medical expenses using HSA funds.
- However, meticulous record-keeping of receipts is crucial to avoid IRS scrutiny and potential penalties.
The HSA Balancing Act: Tax Benefits vs. Record-Keeping
Financial experts frequently highlight the three-pronged tax benefits of health savings accounts. To maximize these benefits, advisors often recommend paying for medical bills out-of-pocket when feasible, investing HSA funds, and then reimbursing yourself years later with tax-free dollars for those past expenses.
However, this strategy hinges on a critical, often overlooked detail: maintaining detailed records of all medical expenses. Without proper documentation, account holders risk facing taxes and penalties from the IRS during an audit.
“People are simply not organized and won't keep detailed records so [that] if the IRS comes knocking, it'll be audit proof for them, for decades,” says Ryan Greiser, a certified financial planner and co-founder of Opulus.
Understanding HSAs
Health savings accounts are tax-advantaged in three ways: contributions are tax-deductible (or pre-tax if through an employer), account growth is tax-free, and distributions for qualified medical expenses are also tax-free. These accounts are available only to individuals enrolled in high-deductible health plans (HDHPs), which have become increasingly common since the early 2000s.
According to KFF, approximately 31% of companies offering health benefits provided an HSA-qualified HDHP in 2025, up from just 4% in 2005. Around 29% of workers with employer-sponsored health plans were enrolled in such plans in 2025, a record high. The increasing popularity is also linked to rising premiums on the Affordable Care Act marketplace.
HSA assets have surged to $174 billion by the end of 2025, from about $30 billion in 2015, with over 4 million accounts holding at least $10,000. Approximately half of these assets ($85 billion) are invested, while the rest remains in cash-like accounts.
Why Receipts Matter
Financial advisors suggest maintaining enough funds in an HSA to cover the annual deductible. For those who can afford it, paying out-of-pocket and investing HSA contributions allows for potential tax-free growth and future reimbursement of medical expenses.
Account holders can withdraw funds for unreimbursed medical bills incurred years ago, provided the expense occurred after the HSA was established and wasn't previously claimed as a tax deduction. However, the IRS requires proof of these expenses during an audit.
“Save all your receipts,” advises Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners. While HSA administrators don't typically require immediate proof of expense, the account holder is responsible for providing it if audited.
The IRS generally has a three-year statute of limitations for audits, but this can be extended to six years for substantial errors or indefinitely in cases of suspected fraud.
Strategies for Record-Keeping
The timing of distributions impacts the audit timeline. Reimbursement years after the expense extends the period for potential IRS review. Some advisors recommend using HSA funds for current expenses to avoid long-term record-keeping burdens.
Experts recommend keeping pharmacy receipts, doctor bills, HSA statements, and explanations of benefits. Digital copies are preferable to paper, which can fade over time. Creating a spreadsheet to track expenses is also a helpful practice.
