Can I Use HSA Funds for Someone Else?

Health Savings Accounts (HSAs) serve as powerful financial tools, enabling individuals to save and pay for qualified medical expenses with significant tax advantages. These accounts offer a unique triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for eligible healthcare costs are also tax-free. HSAs are designed to work in conjunction with high-deductible health plans (HDHPs), providing a way to manage out-of-pocket medical costs while accumulating funds for future healthcare needs. This structure makes HSAs a beneficial option for many seeking to optimize their healthcare spending and savings.

Defining Eligible Individuals for HSA Funds

Beyond the account holder, Health Savings Account funds can be used for a legally married spouse and certain dependents, as defined by Internal Revenue Service (IRS) guidelines. While an HSA is always held individually, its benefits extend to these specific family members for their qualified medical expenses. Married individuals, even if covered by the same HDHP, must establish separate HSAs, though one spouse can use their HSA funds to cover the other’s eligible expenses.

For HSA purposes, the definition of a dependent is distinct from merely being covered under a health insurance plan or being claimed as a tax dependent on an income tax return. The IRS specifies that funds can be used for a qualifying child or a qualifying relative.

A qualifying child generally must meet relationship, age, residency, and support tests, and cannot have provided more than half of their own support. For instance, minor children and full-time students under a certain age often qualify.

A qualifying relative, on the other hand, must also meet specific criteria, including relationship or household member status, gross income limitations, and a support test where the account holder provides more than half of their financial support. This broader definition means that even if an individual is not claimed as a dependent on the HSA holder’s tax return due to specific circumstances—such as filing a joint return, exceeding a gross income threshold, or being claimed as a dependent by someone else—their medical expenses may still be eligible if they otherwise meet the IRS’s dependency tests.

Qualified Medical Expenses for Eligible Individuals

The types of expenses considered “qualified” for HSA distributions remain consistent, whether for the account holder or for eligible spouses and dependents. These expenses are broadly defined by the IRS as costs paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, as well as for treatments affecting any part or function of the body.

Common examples of qualified medical expenses include doctor visits, prescription medications, dental care, vision care, and hospital stays. Certain over-the-counter medications and products also became eligible for reimbursement without a prescription. The IRS provides extensive guidance on what constitutes a qualified medical expense in publications like IRS Publication 502.

There are, however, specific exclusions. Expenses generally not considered qualified include cosmetic surgery (unless necessary to correct a deformity or disfigurement), general health items not for medical treatment, and most insurance premiums. Exceptions for insurance premiums exist for certain types of coverage, such as COBRA, qualified long-term care insurance, and Medicare Parts A, B, and D premiums. It is important that the expense is primarily for the prevention or alleviation of a physical or mental defect or illness, rather than merely beneficial to general health.

Documentation and Compliance

Maintaining meticulous records is essential when using Health Savings Account funds, especially when distributions are made for eligible individuals other than the account holder. The IRS requires account holders to keep sufficient records to demonstrate that all distributions were used exclusively for qualified medical expenses and had not been previously reimbursed from another source or taken as an itemized deduction. These records should include receipts and Explanation of Benefits (EOBs) from the health plan.

In the event of an IRS audit, the account holder is responsible for substantiating all HSA distributions. Electronic records are generally acceptable, but they must be maintained in a way that ensures their accuracy and accessibility.

Using HSA funds for non-qualified expenses or for individuals who do not meet the IRS eligibility criteria carries significant tax consequences. Such distributions are subject to ordinary income tax on the withdrawn amount. If the account holder is under age 65, an additional 20% penalty tax applies to the non-qualified distribution. This penalty is waived if the account holder is age 65 or older or becomes disabled. The ultimate responsibility for ensuring compliance with all HSA rules and maintaining accurate records rests solely with the HSA account holder.