Changed HSA Custodian – Prior Year Contribution?

This question was sent in by HSA Edge reader Charlie:

I have had an HSA for a number of years. This year, in February 2019, I opened a new HSA at a different institution and transferred the balance from my old account. Now, I’m wondering can I make a contribution to this new HSA for 2018? I didn’t contribute to the old, closed account for 2018.

Contribution limit is by owner, not account

The short answer is, “Yes”, you can contribute to the new HSA given your eligibility last year. It does not matter at which bank (or, “custodian”) you make your HSA contribution, just that you were an eligible individual for the year in question. Just make sure you flag it as a prior year contribution to account for it in 2018 as opposed to 2019.

The reason is the HSA laws are not concerned with where you deposit the funds. Instead, they calculate the amount you are allowed to contribute, your contribution limit, by year and leave it to the account holder to contribute them to the HSA of their choice. In fact you can contribute that amount to multiple HSA’s (e.g. at different banks) if you like. There isn’t a relation or enforcement between the HSA you had open during the eligible period and where you must contribute the funds.

The only timing question related here is for qualified medical expenses. Per Form 969, qualified medical expenses (those payable with HSA funds) must occur after you open the HSA. All of your expenses would have occurred after you opened your original HSA, so this does not apply, but is something to keep in mind.

Note: If you need help preparing your HSA tax form 8889, please consider my service It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes. - complete HSA Form 8889 in 10 minutes!

How to Handle HSA Excess Employer Contributions

I was covered under a high deductible plan but also by my parents’ plan. I didn’t realize my employer would be putting money in an HSA for me. I tried to request a distribution for ineligible contribution from my HSA but the HSA custodian wouldn’t release the money to me since my employer put it in. What are my options?

Add Excess Contributions to Income

It sounds like you had excess employer contributions in 2018. Often this occurs when an employer contributes more than your contribution limit for the year. It also occurs when you receive contributions but are HSA ineligible, like in your case due to multiple insurance coverage. This isn’t the worst thing in the world as it is free money, and all you need to do is add it to income to pay taxes on it. Per Form 969:


As you can see, you just add the excess contributions to income and leave the employer contributions in the HSA.

Excess Contributions made by your employer are included in your gross income.

By paying tax on them and keeping them in your HSA, this fulfills their original intent of the contribution being used for qualified medical expenses. The downside here is you have less flexibility on your post tax dollars (compared to if they were in your pocket), but it was free money to begin with.

Note: If you need help preparing your HSA tax form 8889, please consider my service It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes. - complete HSA Form 8889 in 10 minutes!

Spending HSA Funds on Step Children


You have HSA eligible coverage and opened a Health Savings Account, diligently making contributions throughout the year. You now have a nice nest egg to protect yourself from routine care, medical surprises, and emergencies. However, on whom you can spend your HSA funds can be confusing. We have previously discussed who can use your HSA funds but the issue of step children, or children of separated parents, is a special case. Sometimes, taxes and step children can be a tricky situation. In this article, we will discuss that step children can be the beneficiaries of your HSA funds.

The IRS Chimes In

The IRS generally lists 4 categories of people on whom you can spend your HSA contributions:

  1. You
  2. Your spouse
  3. Your dependents
  4. Anyone you could claim as a dependent

You will notice that step children are not mentioned in the common recipients here. But if you dig a little deeper into the IRS materials you will find a surprising answer. In a rare moment of foresight, the IRS directly addresses the case of step children issue in a follow up discussion of this rule. This appears in Form 969:


The IRS states that if the parents have been divorced or separated or living apart for the last 6 months of the calendar year, the child is considered a dependent for both parents. That child then falls into point 3 in the above list of HSA eligible expenses, so you can spend your HSA on them.

A child of parents that are divorced, separated, or living apart for the past 6 months of the calendar year is treated as the dependent of both parents.

However, it isn’t clear if this “6 months” applies only to the 3rd case (living apart) or all three cases (divorced and separated). All hail the Oxford comma! Why the IRS includes this confusing 6 months of calendar year test is beyond me, perhaps it is used as some basis to confirm the parents are actually living apart for good. So what if the parents separated in January-June versus later in the year, say September? Does the 6 months of a calendar year (July-December) have to be satisfied before the child is treated as a dependent? That just seems weird to me.

HSA’s and Step Children

My interpretation (which has not been confirmed) is that the 6 months applies only to parents living apart. Thus, if you are divorced or separated, your HSA funds can be applied to your step children, regardless of who has custody of the children. Also note that this applies to your spouse’s children i.e. your stepchildren.

Let’s assume a situation where a mother and father with 1 child separate and remarry; here are some examples of who can spend HSA funds:

  • Mother spends HSA on child
  • Stepfather spends HSA on child (technically their stepchild)
  • Father spends HSA on child
  • Stepmother spends HSA on child (technically their stepchild)

In addition, if the mother and father remarry and their respective spouse has children, they now have stepchildren of their own and can spend their HSA on them:

  • Mother spends HSA on their stepchild
  • Father spends HSA on their stepchild

In sum, the HSA is flexible enough to allow for spending funds on stepchildren, if you can make your way past the IRS wording.

Note: If you need help preparing your HSA tax form 8889, please consider my service It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes. - complete HSA Form 8889 in 10 minutes!