Question: How do the HSA rules apply to an employee who covers a domestic partner under the HDHP?
Short Answer: The employee will have the standard family HSA contribution limit, but the employee typically will not be able to take tax-free medical distributions from the HSA for the domestic partner’s medical expenses.
Domestic Partner Health Plan Coverage: General Rules
Many employer-sponsored group health plans offer employees the ability to enroll their eligible domestic partners. In some cases, this is to comply with applicable state insurance law for registered domestic partners. Many employers also choose to offer domestic partner coverage more broadly to company-defined domestic partner meeting certain eligibility criteria established by the employer.
For more details, see:
- ABD 2020 Health Benefits for Domestic Partners Guide
- Registered Domestic Partners and Company-Defined Domestic Partners
- Tax Consequences for Domestic Partner Coverage
- COBRA for Domestic Partners
- Mid-Year Enrollment of a Domestic Partner
Domestic Partner HDHP Enrollment Permits Family Contribution Limit
The HSA rules define family HDHP coverage as any coverage other than self-only coverage. This means that employees who are HSA-eligible and cover at least one other individual under the HDHP can contribute up to the family HSA limit.
The family contribution limit ($7,200 in 2021) is available regardless of which other individuals are covered under the HDHP. The other individuals could be the employee’s spouse, domestic partner, child(ren), etc.
Furthermore, the other covered individuals do not need to be a) eligible for tax-free coverage under the HDHP, or b) HSA-eligible for the family contribution limit to apply.
- Oprah enrolls in HDHP coverage for herself and her domestic partner Stedman for all of 2021 (and has no disqualifying coverage).
- Oprah’s (non-tax dependent) domestic partner Stedman also has employee-only coverage under a non-HDHP HMO plan with his employer.
- Oprah is eligible to make the full $7,200 family HSA contribution limit for 2021 because she has at least one other individual covered under the HDHP.
- The facts that Stedman is a non-tax dependent domestic partner and has other disqualifying coverage are irrelevant for purposes of Oprah’s ability to contribute to the family HSA limit.
- Note that Stedman cannot make or receive HSA contributions to an HSA in his name because he is not HSA-eligible.
- Note that while Oprah is subject to imputed income and after-tax contributions for the HDHP coverage of Stedman, no adverse tax consequences apply to the employer or employee HSA contributions for Oprah because the HSA is owned exclusively by the employee.
For more details, see:
- ABD 2020 Go All the Way With HSA Guide
- The HSA Spousal Contribution Limit
- 2021 Inflation Adjusted Amounts for HSAs
Domestic Partner’s Medical Expenses Generally Not Eligible for Tax-Free HSA Distribution
HSAs can reimburse only IRC §213(d) qualified medical expenses on a tax-free basis. The general rule is that there are two adverse tax consequence of taking a non-medical HSA distribution:
- The distribution will be includible in gross income; and
- The distribution will be subject to a 20% additional tax (pre-age 65).For more details, see: Using an HSA for Non-Medical Expenses.
For an eligible expense to qualify for a tax-free HSA distribution, the expense must be incurred by the employee (the HSA holder), the employee’s spouse (same-sex or opposite-sex), the employee’s tax-dependent child (ACA age 26 rule does not apply), or the employee’s qualifying relative tax dependent (e.g., a tax-dependent domestic partner).
A domestic partner’s medical expenses will qualify for a tax-free distribution from the employee’s HSA only if the domestic partner qualifies as the employee’s tax dependent under IRC §152, as modified by §223(d)(2)(A).
The §223(d)(2)(A) modified tax dependent status for a domestic partner generally requires the following:
- Not a Qualifying Child: The domestic partner cannot be a qualifying child of any taxpayer;
- Member of Household: The domestic partner must live with the employee all year as a member of the employee’s household (the “same principal place of abode”);
- Support Test: The employee must provide more than half of the domestic partner’s support during the year; and
- Citizen/Resident Test: The domestic partner must be a U.S. citizen, U.S. resident alien, U.S. national, or resident of Canada or Mexico.
- Note: The §223(d)(2)(A) modification removes certain requirement from the general tax dependent definition, including the gross income limitation (which otherwise would require the dependent’s gross income to be less than $4,300 (indexed)).
The result is that in most situations employees will be subject to income tax and (if under age 65) a 20% additional tax for distributions for any expenses distributed from the HSA for a domestic partner’s medical expenses.
The domestic partner’s medical expenses will not qualify as the employee’s medical expenses for HSA purposes unless the domestic partner qualifies as the employee’s §223(d)(2)(A) tax dependent.
The Domestic Partner Double Family HSA Contribution Loophole
For married couples where one or both spouses are enrolled in family HDHP coverage, there is a special combined family contribution limit for both spouses that limits the aggregate contribution to the family HSA maximum ($7,200 in 2021).
For more details, see The HSA Spousal Contribution Limit.
However, the special combined family HSA contribution limit does not apply to domestic partners because they are not spouses. Furthermore, the family HSA contribution limit applies for all HSA-eligible individuals in any coverage other than self-only coverage.
Therefore, if both domestic partners are HSA-eligible and enrolled in family HSA coverage, they can each contribute the family HSA maximum to their respective HSAs.
- Domestic partners Oprah and Stedman are both HSA-eligible and enrolled in Oprah’s HDHP coverage (employee + domestic partner) for the full 2021 calendar year.
- Oprah and Stedman can both contribute to the $7,200 2021 family HSA contribution limit in their respective HSAs.
- The family HSA contribution limit is available for Oprah’s and Stedman’s HSA because they are both enrolled in HDHP coverage other than self-only (employee + domestic partner).
- Because they are not married, the special combined family HSA contribution limit does not apply.
- Their total combined HSA contribution limit is therefore double the family HSA contribution limit: $7,200 to each HSA, $14,400 total.
For more details on everything HSA, see our ABD 2020 Go All the Way With HSA Guide.
For more details on domestic partner coverage, see our ABD 2020 Health Benefits for Domestic Partners Guide.
(4) Family coverage.
The term “family coverage” means any coverage other than self-only coverage.
IRS Notice 2004-50:
Q-12. What is family HDHP coverage under section 223?
A-12. Under section 223(c)(4), the term “family coverage” means any coverage other than self-only coverage. Self-only coverage is a health plan covering only one individual; self-only HDHP coverage is an HDHP covering only one individual if that individual is an eligible individual. Family HDHP coverage is a health plan covering one eligible individual and at least one other individual (whether or not the other individual is an eligible individual).
Example. An individual, who is an eligible individual, and his dependent child are covered under an “employee plus one” HDHP offered by the individual’s employer. The coverage is family HDHP coverage under section 223(c)(4).
(2) Qualified medical expenses.
(A) In general. The term “qualified medical expenses” means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care (as defined in section 213(d)) for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. For purposes of this subparagraph, amounts paid for menstrual care products shall be treated as paid for medical care.
IRS Publication 969:
Self-only HDHP coverage is HDHP coverage for only an eligible individual. Family HDHP coverage is HDHP coverage for an eligible individual and at least one other individual (whether or not that individual is an eligible individual).
Qualified medical expenses are those incurred by the following persons.
- You and your spouse.
- All dependents you claim on your tax return.
- 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 $4,200 or more; or
- You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2019 return.
ABA JCEB IRS Q/A (May 2010):
- § 223 – Contributions to Health Savings Account
An employee elects family coverage for himself and his domestic partner under a high deductible health care plan (HDHP) for a calendar year. The domestic partner is not the employee’s dependent. The fair market value of the health coverage for the domestic partner is imputed as income to the employee.
Question A: What amount can the employee contribute to a health savings account (HSA) during the year such coverage is elected, disregarding any “catch-up contribution” that may be available to the employee?
Question B: Does the special rule for married individuals that limits the contribution amount that a husband and wife can make to an HSA apply to the employee and his domestic partner?
Question C: What amount can the employee’s domestic partner contribute to an HSA during the year such coverage is elected, disregarding any “catch-up contribution” that may be available to the employee’s domestic partner?
Proposed Response A: Since the employee has elected family coverage defined in Section 223(c)(4) of the Code as “any coverage other than self-only coverage” and Notice 2004-50 confirms that family HDHP coverage is HDHP coverage for one HSA-eligible individual and at least one other individual (whether or not the other individual is an HSA-eligible individual), the employee is treated as having family HDHP coverage and is eligible for contributions up to the HSA contribution limit for family HDHP coverage.
Proposed Response B: No. The HSA contribution limits imposed on married individuals do not apply to domestic partners. The Defense of Marriage Act provides that domestic partners will not, for federal tax purposes, be considered each other’s “spouse.” 1 U.S.C. § 7. Thus, the employee and his domestic partner are not subject to the contribution limits imposed on married individuals.
Proposed Response C: The employee’s domestic partner is eligible to contribute up to the HSA contribution limit for family HDHP coverage for the same reason that the employee is eligible to contribute up to the HSA contribution limit for family HDHP coverage.
IRS Response A: The Service representative agrees with the proposed response.
IRS Response B: The Service representative agrees with the proposed response.
IRS Response C: The Service representative agrees with the proposed response.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).