The IRS released their guidance on the recent changes to regulations regarding tax free HSA withdrawals. As of January 1, 2011, withdrawals (distributions) from your HSA or Archer MSA to pay for medications are tax-free ONLY if:
the medicine or drug requires a prescription,
it is an over-the-counter medicine or drug and the individual obtains a prescription, or
it is insulin.
If amounts are distributed from an HSA or Archer MSA for any medicine or drug which does not satisfy this requirement, the amounts will be considered “distributions for nonqualified medical expenses”, which must be included in your gross income and are subject to a 20% penalty. This change does not affect HSA or Archer MSA distributions made before January 1, 2011 for medicines or drugs , nor does it affect distributions made after December 31, 2010, for medicines or drugs purchased on or before December 31, 2010.