What happens to the taxability of funds used from an HSA or MSA for qualified medical expenses?

When funds from a Health Savings Account (HSA) or a Medical Savings Account (MSA) are used for qualified medical expenses, those funds are not subject to federal income tax. This tax advantage is a key feature of HSAs and MSAs, intended to encourage individuals to save for and cover their medical expenses with tax-free dollars.

Qualified medical expenses typically include a variety of healthcare costs, such as doctor visits, hospital services, prescription medications, and certain necessary medical supplies. Because the funds are designated for these specific expenses and the accounts are structured to provide tax benefits, any withdrawals made for qualifying medical expenses are not taxed, hence not diminishing the value of the savings.

This outcome promotes the use of these accounts for their intended healthcare purposes, allowing individuals and families to manage and pay for medical expenses effectively without incurring additional taxes on those funds.