I don’t know a lot about Health Savings Accounts. I’ve only had the brief experience I will describe. They are an instrument designed to allow people to put pre-tax money in an account to later be used to pay for medical expenses. If the money is withdrawn for non-medical purposes, then the IRS will rightfully expect taxes to be paid. I believe that most people with HSAs probably started them when employed by corporations with a payroll deduction system. That was the case with my partner, Annie. She was employed by CIGNA.
Unlike IRAs, which are tracked by the owners because they represent a source of support after retirement, and from which they are required to make withdrawals after age 70 ½, people who are healthy can easily lose track of their HSAs. That is what happened with Annie. She has been retired since 2011 and was no longer working for CIGNA at that time. Further, she moved away from Denver when she retired. The bank managing her HSA had no idea where she moved to. So, after years of inactivity, they sent the money in the account to the Colorado treasury’s office for unclaimed property. We are now in the process of recovering these funds while, at the same time, trying to persuade the IRS that this “distribution” does not represent taxable income. The moral is, if you have an HSA, don’t lose track of it.