Can I Use My HSA to Pay for My Dependents?

Health Savings Accounts (HSAs) offer a tax-advantaged way to save and pay for qualified medical expenses. These accounts are paired with a High Deductible Health Plan (HDHP) and allow individuals to contribute pre-tax dollars, grow funds tax-free, and make tax-free withdrawals for eligible healthcare costs. HSAs provide flexibility for both immediate medical needs and long-term healthcare savings.

Who Qualifies as an HSA Dependent?

Using HSA funds for dependents requires understanding specific IRS definitions. For HSA distribution purposes, a dependent is generally someone you claim on your tax return. This definition differs from the Affordable Care Act (ACA) rule that allows adult children to remain on a parent’s health insurance plan until age 26, as HSA eligibility for dependents is based on tax dependency, not health plan coverage.

The IRS categorizes dependents into two main types: a “qualifying child” and a “qualifying relative.” A qualifying child must meet relationship, age, residency, support, and joint return tests. This generally includes children or siblings who are under age 19, or under 24 if a full-time student, and live with you for more than half the year while not providing more than half of their own support.

A “qualifying relative” encompasses a broader range of individuals who do not meet the qualifying child criteria but still receive significant support. This person must meet relationship or household member tests, have a gross income below a certain amount, and receive more than half of their total financial support from you. For HSA purposes, your dependent does not need to be covered under your High Deductible Health Plan.

What Medical Expenses are Eligible?

HSA funds can be used for a wide array of qualified medical expenses for you, your spouse, and qualifying dependents. The types of expenses considered eligible are generally consistent with those defined by the IRS for medical expense deductions.

Common eligible expenses include doctor visits, prescription medications, dental care, and vision care. Also covered are items such as acupuncture, ambulance services, artificial limbs, and hearing aids. Certain long-term care services and specific over-the-counter medicines and products, like menstrual care products, are also considered qualified medical expenses.

For a comprehensive list of eligible expenses, consult IRS Publication 502, “Medical and Dental Expenses.” While this publication provides extensive guidance, it is important to note that it may not be exhaustive, and specific HSA rules can sometimes differ. Most health insurance premiums are not qualified medical expenses.

Tax Considerations and Record Keeping

Distributions from an HSA used to pay for qualified medical expenses of a qualifying dependent are tax-free and penalty-free. This tax advantage applies as long as the expenses were incurred after the HSA was established. This allows account holders to leverage their HSA savings to cover healthcare costs for eligible family members without incurring additional tax burdens.

If HSA funds are used for non-qualified expenses for a dependent, or for anyone else, the distributed amount becomes taxable income. In addition to income tax, these non-qualified distributions may be subject to an additional 20% penalty if the account holder is under age 65. The penalty is waived if the account holder is 65 or older or becomes disabled.

Maintaining thorough records of all HSA distributions is crucial. The IRS requires account holders to keep sufficient documentation to prove that distributions were used exclusively for qualified medical expenses and were not reimbursed from another source or taken as an itemized deduction. Examples of records to retain include receipts for services or products, Explanation of Benefits (EOBs) from insurance providers, and documentation proving the dependent relationship.

These records should be kept with your tax documents, typically for at least three years, the period during which a tax return remains open for potential IRS inquiry. Digital records are generally acceptable if treated with the same care as physical records. Proper record-keeping helps ensure compliance and can prevent potential tax issues during an audit.