In relation to health savings accounts, what does a nonqualified distribution imply?

A nonqualified distribution from a health savings account (HSA) refers to funds that are withdrawn for purposes other than qualified medical expenses. This means that if the money is used for any expenses not recognized as eligible medical costs under IRS guidelines, it is considered a nonqualified distribution. Such distributions are subject to income tax, and they may also incur an additional penalty tax if the account holder is under the age of 65.

Qualified medical expenses typically include costs like hospital bills, prescription medications, and preventive care, among others. By ensuring that distributions align with these medical expenses, individuals can benefit from tax advantages associated with health savings accounts.

In contrast, a distribution made after the age of 65, while potentially still nonqualified, is not categorized in the same way because it may not incur the penalty—though it would still be taxable if not used for qualified medical expenses. Distributions for educational expenses or those made by an employer are unrelated to the concept of qualified or nonqualified distributions from HSAs.