Which statement best defines non-qualified withdrawals from a health savings account?

Non-qualified withdrawals from a health savings account (HSA) are defined correctly by the statement that they incur income tax and penalties. HSAs are designed to encourage saving for medical expenses; hence, withdrawals that do not qualify for tax exemption must be treated differently.

When funds are withdrawn from an HSA for non-qualified expenses—meaning the funds are not used for eligible medical costs as defined by the IRS—those withdrawals become subject to ordinary income tax. Additionally, if the account holder is under the age of 65, there is typically a 20% penalty imposed on those funds. This structure incentivizes users to reserve their HSA funds for medical costs, aligning with the account's purpose.

The tax penalties associated with non-qualified withdrawals emphasize the importance of using HSA funds responsibly and for the intended purpose, further solidifying the distinction between qualified and non-qualified withdrawals.