Tag Archives: Children

Can I Spend HSA Funds on My Spouse or Children?

Overview

One question that pops up fairly regularly is, “On whom can I spend my HSA funds?”. You have gone through all of the right steps of selecting HDHP coverage, opening an HSA, and making contributions to your HSA. You know that you need to spend you HSA dollars on qualified medical expenses, but whose medical expenses can be paid for with HSA dollars? In other words, we are defining what is a qualified medical expense, just the “who” part.

Luckily, there are three groups of people on whom can spend your Health Savings Account. In other words, these people receive benefits from your HSA, whether they are actually on your HSA insurance or not. Per IRS Publication 969:

Qualified medical expenses are those incurred by the following persons:

  1. You and your spouse
  2. All dependents you claim on your tax return
  3. Any person you could have claimed as a dependent on your tax return (see exceptions)

So while your family may not be covered by your HSA eligible insurance, they are at least covered by your HSA dollars.

You and your Spouse

Intuitively, we know that you can spend your HSA funds on yourself. Heck, you insured yourself, opened the HSA, contributed the funds; I sure hope you can spend it on yourself!

What is less known is your HSA contributions can be used on your spouse as well. This is especially true if you have self-only coverage: even if not covered by an HDHP, medical expenses spent on your spouse are considered qualified. The benefit is your spouse can consume medical care on a pre-tax bases. One partner can save funds in their HSA, and still allow the other to use those dollars.

In fact, the plan owner need not be present during the spouse’s medical spending, nor does it have to be spent with your specific HSA funds or debit card. Like all qualified medical expenses, he/she can spend with regular cash or credit card, and later reimburse themselves with pre-tax HSA dollars. Of course, in this scenario you will want to save receipts in something like TrackHSA.com to justify the expense / reimbursement, but it just shows the flexibility that Health Savings Accounts offer spouses.

Children and other dependents

In addition to your spouse, you can spend your HSA dollars on your family. This generally includes your children or any other dependents you can claim on your tax return. The IRS defines dependents as a qualifying child or relative, based on the IRS guidelines. So this could include a family member relation for whom you care. This is a great incentive for people with kids as it allows many of their medical expenses to be purchased with pre-tax dollars, which saves money. Medical expenses for your dependents count as qualified medical expense, so go ahead and use your HSA for those purchases.

People you could have claimed as dependents

The IRS includes wording that includes an additional category of people who could have been your dependents, but were not for varying reasons. The goal of this third group is to increase the people for whom spending counts as your qualified medical expenses. The IRS defines this group as:

Any person you could have claimed as a dependent on your return except that:

  • The person filed a joint return,
  • The person had gross income of $4,050 or more, or
  • You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s
    return.

So these are not true dependents but are “candidates” for dependents but were not for various reasons. For example, if your children have a gross income above a certain threshold, they may not be considered a dependent, but the IRS allows their expenses to be qualified medical expenses for your HSA. In a similar vein, if you or your spouse can be claimed as dependents on someone else’s tax return (e.g. younger couples), the IRS waives this and allows the qualified medical expenses to occur.

HSA spending for children of divorced parents

IRS publication 969 provide specific language on how qualified medical expenses for children of divorced parents is handled:

For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child’s exemption.

Basically, they again increase the universe of people that constitute a qualified medical expense. They do this by saying, “if the parents were separated for the last year’s last 6 months, the child counts as a dependent for both for HSA’s”. In other words, either parent can use their HSA dollars for their children even if they are divorced/separated and dependent status is up in the air. The other parent’s actions regarding dependent and taxation do not affect how the other parent treats the child for qualified medical expenses on their Health Savings Account. This is a good ruling by the IRS as it allows more benefits to divorced families / children when it comes to their medical care.

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Note: if you need to keep track of HSA purchases for yourself, your spouse, or your children, please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.

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How to Open an HSA if your Employer Doesn’t Offer One

This was a reader question submitted by HSA Edge reader Alice. If you have a question get in touch and we’ll try to help. Email us at evan@hsaedge.com.

Our health insurance is through my husband’s work. We have a HDHP and an HSA account. Our oldest child is now 22 and out of college, employed full time, and we will not be declaring him a dependent on 2016 taxes. He is still on our health insurance plan, as it was the same cost to us.

My understanding is we cannot pay for his medical expenses with our HSA account, since he is not our dependent. I believe he is allowed to open his own HSA account. However, his work says he cannot open it through them, since he’s not on their health plan. My husband’s employer has told us he can open his own HSA but he can only contribute post-tax dollars, completely negating the purpose of the HSA account. What is the law and where/how does he open his own HSA account and contribute pre-tax earnings?

Thanks for your email. I only recently learned about the adult child HSA and it is a great benefit. Everything you say is true: your son has HSA eligible insurance, he can have his own HSA, his employer does not offer an HSA, and you cannot pay for his medical expenses using your HSA. There is just one key part missing that provides the tax benefit.

Your son does not need to have an employer open a Health Savings Account for him, he can do this on his own at whatever banking institution he likes. The only requirement is that you have HDHP eligible health insurance, which he does. All he has to do is some research on banks that offer HSA’s and go online and click “Open HSA Account” and fill out the forms. When selecting a provider, I would look at the fee structure because that can vary; I have had success with HSAbank.com.

In fact, many people establish HSA’s without their employer’s help. Employer’s that offer actual Health Savings Accounts (via a 3rd party banking institution) are likely also making contributions to the employee’s HSA. So in that regard it makes sense that they help you open the account as they will be directing their (and possibly your) contributions there. However, this is not at all required. There are many people (for example, the self employed) who have HSA eligible insurance and open up their own HSA account. Totally legit and acceptable, all the law states that you need is HSA eligible insurance.

As for tax benefits, it is true that your son will contribute post tax dollars to the HSA. However, this amount will be deducted from his income when he files his yearly taxes (see: Automatic vs. Manual Contributions), reducing the amount of tax he owes then. Specifically, when he completes HSA Form 8889, the amount he contributes to the HSA will flow down to Line 13, which will make its way onto Form 1040 and reduce his taxes.

So in summary, he does not need to contribute pre-tax earnings. Instead, his post-tax contributions will be converted into pre-tax contributions once he files his taxes, so he can enjoy all of the benefits of the HSA.

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Note: if you have an HSA, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.


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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.