Can we use employer contribution HSA (we do not contribute any money) for our daughter's hospital bills who's on our insurance, but is not our dependent?

[Opus 17 · Accepted solution]

Possibly. IRS publication 969 states that you can use an HSA to pay qualifying medical expenses for yourself, a spouse, or a dependent. You can include expenses for a person who would have been your dependent  if the only reason they are disqualified is that they earned more than $4050 during the tax year. 

That refers to the rules for a "qualifying relative" dependent. Your child can be a qualifying relative dependent if you provide more than half their total financial support, and they earned less than $4050.   (For a child to be a qualifying relative dependent, it doesn't matter where they live or how old they are. You just have to provide more than half their support.)  If you provide more than half your child's support, but they are disqualified from being a tax dependent because their income is over the limit, then even though you can't claim them as a tax dependent, their medical expenses you can still pay their medical expenses from your HSA.

 If your child is disqualified from being your dependent because they pay more than half of their own financial support, then even though you provide their health insurance up to age 26, you can't use the HSA to pay their out-of-pocket expenses. 

[nancybotaxes]

Thank you Opus 17.  This has been really confusing. Thanks for the information. We did not pay for more than half of her financial support because she is married and lives with her husband. However the part I'm still a little confused on is the employer contribution money which is not subject to federal tax. We did not put any money in our HSA, it is only the employer's contribution money that is in our HSA. What exactly are the restrictions on using the employer's contribution? I know we would be penalized with taxes if we used any money that we would have contributed into the HSA if we used it towards her medical bills (because she is not a dependent) but again we did not put any money and never have put any money into our HSA. I appreciate any help on this. Thank you!

[Opus 17]

All money in an HSA is treated the same way, whether it comes from an employer contribution, a payroll deduction, or an after-tax contribution.  If you withdraw money for a nonqualified purpose, it will be taxed as ordinary income plus a 20% penalty.

 Because your daughter is married, she cannot be your dependent if she files a joint return with her spouse.  If she files a separate return from her spouse, you would be able to claim her as a dependent for medical purposes only if you provided more than half of her support.

[nancybotaxes]

Okay, thank you!