HSA Mistakes to Avoid: Dependent Rules
If you offer a qualified High Deductible Health Plan (HDHP), your employees can open a Health Savings Account (HSA) to help save for medical expenses with pre-tax dollars.
These funds can also be used for your employees’ tax dependents, but there are some eligibility rules to consider.
Adult Child Dependents and HSAs
There is an important difference between Patient Protection and Affordable Health Care Act (ACA) rules and HSA rules for dependents. The ACA requires major medical plans to cover dependents to the age of 26, but it doesn’t require these dependents to be tax dependents.
To use HSA funds for dependent expenses, the dependent must specifically be able to be claimed as a dependent on the HSA owner’s tax return. Because of this, a scenario could exist where an employee’s adult dependents are covered on the medical plan, but the employee’s HSA cannot be used to cover medical expenses for those dependents.
How It Works
For example, let’s say an employee’s 24-year-old son is employed and files his own tax returns. This means he is not eligible to be claimed as a tax dependent on his parents’ tax return. He may be enrolled in his parent’s qualified HDHP until he reaches age 26, but their HSA funds cannot be used to help pay his out-of-pocket medical expenses.
Because the employee’s HSA funds can’t be used for this dependent, the adult child may wish to establish a separate HSA for his expenses. However, there is something unique about this situation that many don’t realize. Because this child is covered on a family-qualified HDHP, opening a separate HSA would allow the child to contribute up to the allowed maximum family contribution of $7,300 (this maximum increases $7,750 starting in 2023). So, the parent (your employee) could have an HSA and contribute the allowed maximum family contribution of $7,300 and the dependent adult child could contribute up to $7,300.
This allows the employee’s HSA funds to be used for the spouse and other qualified dependents, while the adult child has his own funds to use for eligible medical expenses.
Keep in mind that the primary account holder (your employee) cannot use pre-tax salary reductions to contribute to the adult child’s HSA. Also, the child’s HSA can only be used for the child’s eligible out-of-pocket medical expenses.
Child Dependents of Divorced Parents
For purposes of eligible medical expenses, under some circumstances, a child of divorced or separated parents can be treated as a dependent of both parents. In this case, each parent can use their HSAs to pay for eligible medical expenses for the child, even if the other parent claims the child as a dependent.
The parent can use HSA funds to pay eligible medical expenses for the child if:
- the child is in the custody of one or both parents for more than half the year;
- the child receives more than half of his or her support during the year from his or her parents;
- the child’s parents:
- are legally divorced or separated;
- are separated under a written agreement;
- always lived apart during the last six months of the year.
This does not apply if the child’s exemption is being claimed under a multiple support agreement. To find out more about covering children and children of divorced or separated parents, please see Internal Revenue Service (IRS) Publication 969 or consult your tax advisor.
How to Prevent HSA Rule Breaking
The best way to prevent HSA rule breaking is to educate your employees on these dependent child rules, as well as ask questions during enrollment. Ask your employees:
- Do you have a child who is covered on your qualified HDHP who is not a tax dependent? If yes, you cannot use your HSA to cover his or her out-of-pocket medical expenses. The child will need to open his or her own HSA to cover out-of-pocket medical expenses.
- For divorced employees: do you have children for whom you would like to use HSA funds? Are the children claimed under a multiple support agreement?
One of the ways American Fidelity can help you and your employees avoid these mistakes is by providing one-on-one benefit reviews during enrollment. During these reviews, our account managers will study and learn all of your benefit offerings—including medical, dental, and vision plans. This also provides an opportunity to ask eligibility questions, and potentially conduct a Dependent Verification Review.
To learn more about how American Fidelity can help, visit americanfidelity.com.
This blog is up to date as of September 2022 and has not been updated for changes in the law, administration or current events.
Shop for Eligible Items on the HSA Store
You may purchase HSA-eligible items online at the HSA Store. Browse medical supplies, over-the-counter medication, prescriptions, and more.