Can You Use HSA to Pay for Other Family Members?

Health Savings Accounts (HSAs) serve as tax-advantaged savings accounts designed for healthcare expenses. These accounts offer a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Many account holders inquire about extending these benefits to other family members. This article clarifies the rules for using your HSA to cover the medical costs of eligible family members, including dependents and spouses, to avoid potential tax implications.

Who Qualifies for HSA Coverage

HSA funds can be used tax-free for the account holder, their spouse, and individuals who qualify as dependents for tax purposes. A spouse does not need to be covered under the account holder’s High-Deductible Health Plan (HDHP) to have their qualified medical expenses paid from the HSA. Similarly, qualified dependents do not need to be on the account holder’s HDHP for their expenses to be covered tax-free by the HSA. Using HSA funds for an adult child not meeting the IRS definition of a qualified dependent will result in a taxable distribution, potentially subject to an additional 20% penalty if the account holder is under age 65.

The Internal Revenue Service (IRS) defines a “qualified dependent” for HSA purposes based on tax status, as outlined in IRS Publication 502 and Publication 969. A dependent can be either a “qualifying child” or a “qualifying relative.” For a qualifying child, general requirements include a relationship to the account holder, living with the account holder for more than half the year, and not providing more than half of their own support. Additionally, a qualifying child must typically be under age 19 or under age 24 if a full-time student.

A “qualifying relative” must meet specific criteria, such as not being a qualifying child of any other person, and receiving more than half of their financial support from the account holder. There is also a gross income limit for a qualifying relative.

What Are Qualified Medical Expenses

A “qualified medical expense” refers to the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses are eligible for tax-free reimbursement from an HSA. Common examples include doctor’s visits, prescription medications, dental care, vision care, and certain over-the-counter medicines and supplies.

The IRS provides extensive guidance on what constitutes a qualified medical expense, and it is important to understand these definitions. Expenses such as cosmetic procedures or general health items like vitamins not prescribed for a specific medical condition are not considered qualified medical expenses. Using HSA funds for non-qualified expenses can lead to the withdrawal being taxed as ordinary income.

Using Your HSA for Eligible Family Members

The process for using HSA funds to pay for an eligible family member’s qualified medical expenses is generally the same as for your own. This can involve using an HSA debit card directly, submitting receipts for reimbursement from your account, or paying providers directly from the HSA. Ensuring that both the individual and the expense meet the IRS criteria is important to maintain the tax-free status of the distribution.

Maintaining meticulous records is crucial when using your HSA, especially for family members. The IRS requires account holders to keep records sufficient to show that distributions were exclusively for qualified medical expenses, were not previously reimbursed, and were not taken as an itemized deduction. This documentation, which includes receipts and Explanation of Benefits (EOBs), is vital in case of an IRS audit. Failure to substantiate that a distribution was for a qualified medical expense for an eligible individual can result in the amount being treated as taxable income.