Can I Use My HSA Card for Someone Else’s Prescription?

Health Savings Accounts (HSAs) provide a tax-advantaged way to cover medical expenses, including prescriptions. However, using your HSA card for someone else’s prescription involves specific rules and regulations.

IRS Prescription Coverage Rules

The IRS permits HSAs to pay for qualified medical expenses, including prescriptions, but only for the account holder, their spouse, or dependents under Section 223 of the Internal Revenue Code. Transactions outside these categories are considered non-qualified.

Dependents are defined as either a qualifying child or a qualifying relative. A qualifying child must meet age, residency, and support criteria, while a qualifying relative must have a specific familial relationship with the account holder and meet income and support requirements. For example, using your HSA for a sibling’s prescription is only allowed if they meet the IRS’s dependent criteria.

Dependent Eligibility Requirements

Determining dependent eligibility for HSA purposes requires meeting IRS guidelines. A qualifying child must share a close relationship with the account holder, such as being a son, daughter, or stepchild, and meet age, residency, and support criteria.

Qualifying relatives include a broader range of relationships, such as parents or siblings, but must meet income and support tests. Their gross income must be below the IRS exemption amount—$4,600 as of 2024—and the account holder must provide more than half of their financial support. These rules ensure HSA funds are used appropriately for dependents’ medical needs.

Proof of Prescription Expenses

To comply with IRS regulations, account holders must maintain thorough documentation of prescription expenses. Required records include receipts with details such as the date of purchase, amount paid, the prescription name, and the prescribing physician.

Supplementary documentation, such as a copy of the prescription or records of pharmacy correspondence, can further substantiate the expense. Comprehensive record-keeping not only ensures compliance but also prepares the account holder for potential IRS audits.

Possible Consequences of Ineligible Use

Using HSA funds for ineligible expenses can result in financial penalties. The IRS imposes a 20% penalty on non-qualified amounts, which must also be reported as taxable income. This increases tax liability, especially for significant amounts.

Ineligible use may also prompt an IRS audit. An audit could require the account holder to provide detailed documentation for all HSA transactions, leading to further scrutiny of financial records.

Steps to Reverse Non-Qualified Transactions

If an HSA transaction is mistakenly used for an ineligible expense, it’s important to act quickly. The account holder should contact their HSA administrator to initiate a reversal. Administrators typically have procedures for correcting such errors.

The account holder can reimburse the HSA by returning the exact amount of the non-qualified expense, ensuring it isn’t reused improperly. This reimbursement must occur within the same tax year as the original transaction to avoid complications. Documenting the reversal process, including all communications and financial records, is vital in case of an IRS inquiry.