If an HSA beneficiary engages in a prohibited transaction, the HSA ceases to be an HSA as of January 1 of the year that the forbidden activity occurs, and the fair market value of the account as of January 1 is deemed distributed but not treated as being used for payment of medical expenses. Thus, it is taxable, and subject to a 20% penalty. Examples of prohibited transactions include borrowing funds from the HSA or pledging the HSA as security for a loan; selling, exchanging or leasing property between the beneficiary and the HSA; furnishing goods or services between the beneficiary and the account; and transferring HSA assets to or for use by or benefit of the beneficiary. (IRS Notice 2008-59, Part V)