Can I Pay a Child's Medical Bills With HSA?

A health savings account is sometimes referred to as a medical individual retirement account. An HSA is a tax-advantaged account that taxpayers can contribute to with pre-tax dollars. Funds in the account are allowed to grow without incurring any federal income tax until they are withdrawn after the account holder reaches retirement age. The account holder may also make tax-free withdrawals from the account to pay for qualified health-related expenses.

Funding

• The money in a health savings account always belongs to the individual account holder, but all HSAs are trustee accounts that must be held by a qualified third-party financial institution such as a bank, insurance company or investment firm. Any trustee company that has already been approved by the Internal Revenue Service to offer individual retirement accounts may serve as trustee for an HSA. HSAs are funded with pre-tax dollars. Employers who offer HSAs may make salary-reduction contributions to the employee's HSA. Taxpayers who fund their own HSAs may deduct their contributions on their income tax returns, even if they do not itemize their deductions.

Withdrawals

• An account holder may take withdrawals from her HSA at any time, for any reason. Withdrawals taken to pay for qualified health care expenses are free from federal income taxes. Qualified health care expenses include those incurred by the account holder, her spouse, and her dependent children. Withdrawals taken after the account holder reaches age 65, or after she becomes disabled, are taxed as ordinary income at the account holder's then current tax rate. Withdrawals taken prior to age 65 for reasons other than to pay qualified health care expenses are taxed as ordinary income plus an additional 10 percent tax penalty, as of the 2010 tax year.

Limitations

• Account holders are limited in the amount they can contribute to their HSAs. Account holders with a single coverage insurance policy may contribute up to $3,050 for the 2010 tax year. Account holders with a family coverage insurance policy may contribute up to $6,150 for the 2010 tax year. Maximum contributions may be adjusted from year to year based on current tax regulations to accommodate cost of living changes. Unlike Flexible Spending Accounts, HSA account holders may only be reimbursed for expenses up to the amount they have already contributed into their account. Also unlike FSAs, there is no use-it-or-lose-it provision for HSAs. Funds may remain in an HSA indefinitely.

Considerations

• An HSA belongs to the individual, even if it is funded by her employer. The account is portable and remains with the individual even if she changes jobs or becomes unemployed. Individuals may have an HSA provided they are not enrolled in Medicare. Individuals who can be claimed on another person's federal income tax return as a dependent are not eligible for an HSA. The HSA must be attached to a high deductible health insurance policy, and the account holder may not be covered by any other health insurance plan. The account holder may withdraw funds from her HSA account to pay for unreimbursed medical expenses for her family members, including her dependent children, even if she only has single coverage under her high deductible health insurance policy.