Who can Contribute to a Health Savings Account?

This is a fairly frequent question from readers who ask, “Who can contribute to an HSA?” or “Who can contribute to my HSA?” These questions take a couple of forms and includes some assumptions, so we will first explain the basics and move to the specifics.

You must have an HSA for anyone to contribute to it

First things first, you must at least open and have a Health Savings Account to be able to contribute to it. Contributing isn’t just some earmark/declaration you make when you file taxes; instead, HSA contributions go to an actual bank account, just like what you might use for checking and savings. This bank account is yours forever and is designated for qualified medical expenses. At retirement age, you can use the account for whatever you like.

You must have HSA eligible insurance in the year to have HSA contributions

A second requirement of contributing to your HSA is that you have HSA eligible health insurance during the year you wish to contribute. This also applies to employer or other contributions (see below) you may receive. You must have a high deductible health plan (HDHP) that meets that year’s HSA requirements to make or receive any contributions. Unfortunately, this prevents you from contributing to an old Health Savings Account if you no longer have qualifying insurance. You have to have coverage at some point during the tax year to make contributions. The key phrase “during the tax year” is important there. This does not mean that you need to currently have coverage to contribute to the HSA. If you had HSA eligible coverage at any point during the year, you can at least make a partial contribution to your HSA.

For example, assume that you had HSA eligible self-only insurance from January – July, and then ended coverage. You made no contributions during that time. You might think that since you made no contributions, you missed out and can contribute nothing to your HSA for the year. This is is not the case. In fact, you are allowed to contribute on a monthly pro-rata basis for the year, in this case 6/12 months or 1/2 of your contribution limit. Health Savings Account contributions and limits are viewed on yearly timeline, and you can even contribute to your HSA in the following year, using what is called a Prior Year Contribution.

Now onto who can actually make contributions to your Health Savings Account.

1) You can contribute to your HSA

Of course, you can make contributions to your own HSA. This is the most common form of contribution and can take two forms, either a cafeteria plan contribution (pre tax), or a manual contribution (post tax) . While the method and timing differs, both result in the same tax benefits once you file taxes. Cafeteria plan contributions are arranged by your employer and remove your HSA contributions from your paycheck on a pre tax basis. These amounts are deposited into your HSA and you enjoy immediate tax savings. Alternatively, you can make manual contributions to your HSA. This is probably the most common method and involves getting paid, paying taxes, and then depositing or transferring post tax money to your Health Savings Account. At tax time, these deposits are retroactively removed from your taxable income, so you reap the tax deduction benefit at tax time.

Form 8889 line 2 contributions

The method in which you make contributions to your HSA also determines how you file HSA tax Form 8889. The above image shows that manual contributions (post tax) made on line 2, whereas cafeteria contributions (pre tax) are made on line 9 (see next image).

2) Your employer can contribute to your HSA

You can also receive employer contributions to your Health Savings Account. This is a great perk because your employer is in effect giving you free money to use for your healthcare. The schedule and amounts at which they contribute will vary based on your employer. Some employers will provide a small contribution to your HSA’s, whereas others may be very generous and fund your entire HSA. Either way, employer contributions are factored into Form 8889 on Line 9.

Form 8889 line 9 employer contributions

Please note, that per the above discussion, that you must have HSA eligible insurance to receive employer contributions to your HSA. So if your employer offers a great benefit like a HSA contribution, but you choose a non-HSA eligible insurance, you cannot take part in that benefit.

3) Other people can contribute to your HSA

Another benefit of Health Savings Accounts is that anyone can contribute to your HSA. This means that you can contribute to anyone’s HSA, and conversely that your parent, grandparent, rich aunt/uncle, or friend can contribute to your HSA. The best part is that the recipient of the contribution receives the tax deduction for the amount contributed, so that is a second order effect, besides having funds in the HSA.

Form 8889 line 2 other contributions

Note that you must declare contributions from others on your Form 8889 on line 2.

Note: all contributions count toward your contribution limit

Remember that all contributions made to your Health Savings Account count toward your yearly contribution limit. This means that you must take into account employer contributions (and contributions from ‘others’) when you determine how much can be contributed to your HSA for the year.

For example, say you have self-only HSA eligible insurance for all of 2016, affording you a $3,350 maximum contribution limit. If your employer generously contributes $3,000 to your HSA, and your parents chip in an additional $300, you would only be allowed to contribute $50 yourself without incurring excess contributions.

Your Adult Children on your Family Insurance can have their own HSA

Overview

Did you know that if your adult children are covered by your HSA eligible family health insurance, they likely can open their own HSA? You read that correctly. A common misconception is that only the policy holder can open a Health Savings Account. This is not true, as a review of the HSA guidelines reveals that this restriction to the policy holder (read: you) does not exist. Said another way:

Every independent (tax) person on an HSA Family Plan can open their own HSA and contribute the full year amount.

With the (un)Affordable Care Act mandating that children be allowed to remain on parent HSA insurance plans until age 26, more and more adult children are opting for this and staying on parent plans longer. The good news is, if they are no longer your tax dependent, they can open their own HSA, and anyone can contribute to another’s HSA account. That means that even if junior is in university and making no money, he can still receive up to $6,750 into his HSA account for 2015 from his loving mom or dad, or grandparent, or whoever.

The mechanics of your child having an HSA

So how does this work? The mechanics lie within the definition of and eligible individual, or who can open an HSA, provided by friendly Publication 969. An eligible individual is defined as one who:

  1. is covered under a High Deductible Health Plan (HDHP)
  2. has no other health insurance
  3. is not enrolled in Medicare
  4. cannot be claimed as a dependent on someone else’s tax return (important)

The key one is really #4, in that an HSA holder cannot be claimed as a dependent on someone else’s tax return. Unfortunately, due to this you cannot open an HSA for your young child or children and begin saving for them. You have to wait until they are filing their own taxes. Other than that, the first 3 should almost always apply to adult children. If all 4 of these are true, your adult child qualified as an eligible individual even though they are on your health insurance. That means they can open their own Health Savings Account and begin saving – or you can begin saving for them.

Child HSA Example – Simple

Let’s assume that you are married and have one child who is not longer your dependent. To keep things simple, assume you have had HSA eligible family insurance for everyone for a while (so no Last Month Rule effects) and you are smart and have your own HSA, but your spouse does not. For 2016, the contribution limit for family insurance is $6,750. As such the following maximum HSA contributions are allowed:

  • You – $6,750
  • Child – $6,750

Note that the above amounts end up in 2 different Health Savings Accounts – one for you, and one for your adult child.

Children HSA Example – Complicated

Now assume that you are married and have two adult children and everyone is on your HSA eligible family insurance. Let’s assume you began that insurance on July 1st (exactly mid year) so the Last Month Rule is eligible for this year. Both you and your wife are smart and have your own separate HSA’s, and thus due to Line 6 of Form 8889 you must share the maximum contribution amount between these two accounts. Note that this does not affect your children. For 2016, the contribution limit for family insurance is $6,750. As such the following maximum HSA contributions are allowed:

  • You & spouse – contributions to both HSA accounts cannot exceed $6,750
  • Child 1 – $6,750
  • Child 2 – $6,750

A couple things of note. You and your spouse are limited to a $6,750 between your accounts (so $3,375/$3,375, or $6,750 / $0 would both work). Also notice that your children can each contribute up to the family contribution limit, separate from you and your spouse’s limitation. This is the big advantage here.

An important note: it is my duty to explain the Last Month Rule here. Since coverage began in July, you are freely allowed to contribute 6/12 x $6,750 = $3,375 for the year for each of these accounts. However, you have the option to use the Last Month Rule and contribute the full $6,750 to each account, but you must maintain coverage for the following year. Otherwise, any amount over contributed to each account can be taxed and penalized.

Reasons to establish Health Savings Accounts for your children

There are a wide number or reasons to establish and contribute to an HSA for your adult children. Children at this age (18-26) are just beginning to understand and manage their finances and establishing good habits can last a lifetime. Additionally, due to the nature of US healthcare you want to offer them every advantage they can get. Having a pile of cash to fall back on for medical care as they go through their 20’s can provide peace of mind as well as incentive to actually go and visit the doctor if something is wrong. It helps remove the money problem from medical decisions. In some ways, it is analogous to opening an IRA for them and contributing, but arguably, more practical.

Here are some additional advantages:

  • Emphasize importance of saving
  • Teach them the value of money and how to navigate US healthcare system
  • Encourage them to manage their finances wisely
  • Provide a financial safety net as they begin their career
  • Allow them to pay for healthcare as it arises
  • Contributions provide a tax deduction on Form 8889

That’s a lot of Filing Form 8889

One thing of note, is that you must file a Form 8889 for every HSA account that receives contributions or spends money, every year. That means that everyone with an HSA – you, your wife, any children – all need to fill out this tax form when filing you taxes each year. Being children, and new to taxes and HSA’s, they are prone to avoid or miss this requirement and incur financial penalty. Help them avoid this by explaining tax requirements; you can even see an article on how to file Form 8889.

Contributing to HSA while unemployed on COBRA insurance

This was a reader question submitted by HSAedge reader Helen, send your questions to evan@hsaedge.com

I am unemployed and not receiving unemployment benefits. I am participating in COBRA from my previous employer. Am I allowed to make HSA contributions if my husband is self-employed and does not have health insurance through his company?

You are allowed to make Health Savings Account contributions while using COBRA, assuming the plan you continue is HSA eligible. My take is that COBRA is a program that forces employers to offer the same insurance to past employees, although the pricing isn’t always the same. Thus, if you use COBRA to continue an HSA eligible plan, everything functions as normal, since you are continuing coverage under the same plan. COBRA just guarantees your access to that same plan. Note that employers are not required to continue making any sort of contributions into the HSA.

From the CobraInsurance website FAQ:

When the employee and dependents become eligible for COBRA, they can take this account with them. The employee can still contribute monies to the HSA and keep it for as long as they want. The employer is no longer obligated to contribute money or responsible for administrating the HSA when the employer or dependents are eligible for COBRA.