Using HSA funds for dependents’ medical expenses

Health savings accounts (HSAs) are a popular way to save funds for future medical expenses. However, many people are unaware of all the ways they can use their funds. While most use their HSA funds for their own medical costs, it's possible to use them for dependents' medical expenses as well.

In this article, we'll explore the benefits of using HSA funds for dependents' expenses.

Did you know you can use an HRA and HSA together? Learn how in our guide

Who can you cover with your HSA?

IRS Publication 969¹ provides guidelines for withdrawing tax-free funds from your HSA for qualified expenses.

You can withdraw money from your HSA bank for:

• Yourself
• Your spouse (regardless of whether you file a joint return)
• Any HSA-eligible dependents you claim on your tax return
• Anyone you would have claimed as a dependent but couldn’t because they filed a joint tax return

Dependents are different for HSAs than they are for medical plans. That’s because HSAs define dependents based on tax status, while the Affordable Care Act (ACA) requires medical plans to cover dependents up to age 26. The IRS breaks dependent status² into two categories: qualifying child and qualifying relative. Here are the requirements for each.

A qualifying child:

• Must bear a certain relationship to the claimant (such as through blood, foster care, adoption, or legal guardianship).
• Can't turn 19 during the calendar year (or 24 if enrolled in college).
• Must share a primary residence with the claimant for at least half of the calendar year.
• Must not provide more than half of their own financial support.

A qualifying relative:

• Must bear a certain relationship to the claimant.
• Must not be a qualifying child of any other person.
• Must earn less income than the exemption amount.
• Must receive more than half of their financial support from the claimant.
• Must reside with the claimant for the entire year.

How do you use HSA funds for your dependents' medical expenses?

Understanding how to utilize your HSA funds for your dependents' health expenses can be a game-changer. Not only can it provide financial relief for out-out-pocket medical costs, but it also ensures that your loved ones have the necessary care they need to stay healthy.

The IRS has strict regulations in place regarding who's considered an eligible dependent, in addition to what products and services you can claim. While HSAs are only in one person's name, account holders can use their funds for their dependent’s medical costs, as long as those out-of-pocket expenses are not being otherwise reimbursed by another HSA or health reimbursement arrangement (HRA).

According to Healthcare.gov³, HSAs aren’t generally used to pay for insurance premiums. However, there are some exceptions. IRS Publication 969 states that an HSA can reimburse your dependent’s long-term care insurance, COBRA premiums, or health insurance premiums while on unemployment.

What other dependent care expenses are covered by HSA funds?

You can use your HSA funds for a variety of other eligible expenses for your dependent. This includes medical, dental, and vision care.

Here are some additional things your HSA covers for your dependents:

• Flu shots
• Pain relievers
• Eye exams
• Physical exams
• Physical therapy
• Speech therapy
• Prescription drugs
• Prenatal vitamins
• Menstrual care products/feminine hygiene products
• Birth control pills
• Motion sickness medication
• Medicated lip treatments
• Diagnostic services
• Diabetic supplies
• Ambulance services

The IRS offers a full list of eligible expenses in Publication 502.

Can I use an HSA with other health benefits?

HSAs are paired with qualifying high-deductible health plans (HDHP) to help offset medical care costs. But HSAs are even more valuable when they're combined with an HRA. With an HRA, employers can reimburse their employee's medical expenses with tax-free money.

There are two types of HRAs that can be paired with an HSA::

• The qualified small employer HRA (QSEHRA) is designed for small businesses with fewer than 50 full-time equivalent (FTE) employees.
• The individual coverage HRA (ICHRA) works for employers of all sizes. With this option, employers reimburse eligible employees for the individual insurance coverage that works best for them.

If you're thinking about combining an HRA with an HSA, you'll need to adjust your HRA to meet the requirements of an HSA. If you have access to a QSEHRA, it must be set up as a limited-purpose QSEHRA that only covers health insurance premiums, dental and vision expenses, and long-term care premiums. If you’re offered an ICHRA, it must be set up to reimburse for insurance premiums only.

Conclusion

HSAs are an effective way to offset medical expenses that health insurance doesn't cover. The money in your HSA can benefit you and your dependents. However, it's important to be clear on regulations, specifically who is eligible to use the funds and what out-of-pocket expenses are acceptable so you can avoid penalties later.

To determine if your dependents' medical expenses are eligible for HSA funds, you should consult IRS guidelines or seek advice from a qualified tax professional.

Want to get your expenses reimbursed with an HRA? Schedule a call with a personalized benefits advisor now!

1. https://www.irs.gov/forms-pubs/about-publication-969
2. https://www.irs.gov/pub/irs-drop/n-08-05.pdf
3. https://www.healthcare.gov/glossary/health-savings-account-hsa/

This blog post was originally published on January 25, 2017. It was last updated on July 28, 2023.