If the following circumstances arise, a taxpayer could face a penalty for their Health Savings Account (HSA):

• If you withdraw money from your HSA for a reason that is not a medical expense. You will have to pay both income tax on the amount you withdraw and an extra 20% penalty (as of 2023).
• If you are under the age of 65 and take out HSA funds for anything other than qualified medical expenses. In addition to the regular income tax, you will have to pay a 20% penalty for withdrawing.
• In case you are no longer eligible for contributing to an HSA. As an example, you won't be covered by a high-deductible health plan anymore. You are prohibited from making any additional contributions. Contributions can be stopped without penalty, but distributions from the account must still be for qualified medical expenses to avoid penalties.

The penalty for non-medical withdrawals stops once you hit 65, but you would still be liable for regular income tax on the withdrawn funds.

This example illustrates the circumstances where a taxpayer can face 20% penalties for withdrawing funds from their health savings account.

Kara, a 54-year-old woman, takes out money to purchase a hotel room to visit her sick father.

If someone under 65 withdraws money for nonmedical expenses, they will be charged an extra 20% tax as a penalty. Kara is not yet 65 years old, so the hotel room is not considered a medical expense.