The penalty tax for nonqualified distributions from a health savings account (HSA) is 20%. This applies when funds are withdrawn for purposes other than qualified medical expenses before the account holder reaches the age of 65.
Qualified distributions from an HSA, such as for eligible medical costs, are tax-free. However, if funds are used for nonqualified expenses, not only are those distributions subject to income tax, but there is also an additional penalty tax applied. This penalty is designed to discourage individuals from using HSA funds for anything other than designated healthcare expenses.
In the context of the other options, they reflect percentages that are not consistent with the current regulations governing HSAs. Understanding the specific percentage of the penalty tax is essential for effectively managing HSA funds and ensuring compliance with IRS rules.