Question: How do the HSA eligibility, contribution, and distribution rules apply to an employee with a family?
Short Answer: HSA-eligible employees with at least one other family member covered under the HDHP will be able to contribute up to the family limit, but they should be aware of potential eligibility and distribution pitfalls.
General Rule: HSA Eligibility
The general rule is that an individual must meet two primary requirements to be HSA-eligible (i.e., to be eligible to make or receive HSA contributions):
- Be covered by an HDHP; and
- Have no disqualifying coverage (generally any medical coverage that pays pre-deductible, including Medicare).
HSA eligibility also requires that the individual cannot be claimed as a tax dependent by someone else.
- For more details on everything HSA, see our ABD 2020 Go All the Way With HSA Guide.
How Family Members Could Block HSA Eligibility: Disqualifying Coverage
If a family member covers the employee under a non-HDHP health plan, the employee will not be HSA eligible because the family member’s coverage is disqualifying coverage for the employee. For example, an employee covered as a spouse, domestic partner, or child under another employer’s non-HDHP health plan is not HSA-eligible.
The most difficult disqualifying coverage issue is the health FSA because participants can reimburse pre-deductible expenses for both the employee and the spouse. The result is that if either spouse is enrolled in a general purpose health FSA, neither spouse is HSA-eligible. They can still be covered by an HDHP, but they cannot make or receive HSA contributions.
- For more details, see our prior post: HSA Interaction with Health FSA.
How Family Members Could Block HSA Eligibility: Can Be Claimed as a Tax Dependent
Individuals are not HSA-eligible if they can be claimed as a dependent on someone else’s (e.g., a parent’s) current-year tax return. See IRS Publication 501 for details on whether an individual qualifies as a tax dependent.
Tax-Treatment of Contributions: Tax-Free Contributions Through Payroll Apply Only to Employee’s HSA
Although extremely uncommon, employers could in theory contribute to the HSA of an employee’s family member (e.g., spouse). Employer tax-free and employee pre-tax contributions to an HSA through payroll are available only for HSA-eligible employees.
Any contribution by an employer or employee through payroll to an HSA held by a non-employee (e.g., the spouse’s HSA) is included in the gross income and wages of the employee. For this reason, it is very unusual to see employers contribute to an HSA owned by anyone other than the employee.
Tax-Treatment of Contributions: Contributions By Family Members Are Deductible by HSA Owner
Anyone may contribute to an HSA-eligible individual’s HSA. For example, a parent may contribute to an HSA-eligible child’s HSA.
HSA contributions made to the HSA of a family member will be deductible by the family member who receives the HSA contributions. For example, if a parent contributes to an HSA-eligible child’s HSA, the child receives the deduction (not the parent).
Note that an individual (including a child) who may be claimed as a dependent on another person’s tax return (including a parent) is not HSA-eligible and therefore cannot make or receive HSA contributions.
The Family HSA Contribution Limit: Family Members’ Other Non-HDHP Coverage Irrelevant
HSA-eligible employees can contribute to the family limit ($7,200 in 2021) if they enroll in any HDHP tier other than employee-only coverage.
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 HSA contribution limit is available regardless of:
- Whether the other covered family members are HSA-eligible (e.g., the family members may also be enrolled in non-HDHP coverage or Medicare); or
- Whether the other covered family members are eligible for tax-free coverage under the plan (e.g., non-tax dependent domestic partners).
- Ben enrolls in HDHP coverage for himself and his domestic partner Julianna for all of 2021 (and has no disqualifying coverage).
- Ben’s (non-tax dependent) domestic partner Julianna also has employee-only coverage under a non-HDHP HMO plan with her employer.
- Ben is eligible to make the full $7,200 family HSA contribution limit for 2021.
- The fact that Julianna is a non-tax dependent domestic partner and has other disqualifying coverage is irrelevant for purposes of Ben’s ability to contribute to the family HSA limit.
- Note that Julianna cannot make or receive HSA contributions to an HSA in her name because she is not HSA-eligible.
The Family HSA Contribution Limit: HSA-Eligible Spouses
Where the employee and spouse are both HSA-eligible, special contribution rules apply.
HSA-Eligible Married Employees: Both Spouses Enrolled in Employee-Only HDHP Coverage
If both spouses are HSA-eligible and enrolled in separate employee-only HDHP coverage, the standard individual HSA contribution limit applies to each spouse.
Both the employee and the spouse can contribute up to the individual contribution limit ($3,600 in 2021) to their respective HSAs. The marriage does not affect each spouse’s standard HSA contribution limit.
Note that there is no such thing as a jointly owned HSA. Every HSA is owned by only one individual. Each spouse would therefore need to contribute to their own HSA to take advantage of the maximum contribution permitted between the two of them.
HSA-Eligible Married Employees: At Least One Spouse Enrolled in Family HDHP Coverage
If one or both spouses are enrolled in family HDHP coverage, a special combined HSA contribution limit applies. “Family” HDHP coverage refers to any coverage other than employee-only coverage (i.e., employee plus child, employee plus spouse, or employee plus family).
Under the special rule, the combined HSA contribution limit for both spouses is the family HSA contribution limit. In other words, the aggregate HSA contribution limit for both spouses combined cannot exceed $7,200 (2021).
The spouses can agree to how they would like to divide the combined limit between them, provided the total HSA contribution by both does not exceed the family limit.
- For more details, see our prior post: Special HSA Contribution Limit for Spouses.
The Family HSA Contribution Limit: HSA-Eligible Domestic Partners and/or Children
The special combined family HSA contribution limit does not apply to domestic partners (because they are not spouses) or children. Furthermore, the family HSA contribution limit applies for all HSA-eligible individuals in any coverage other than self-only coverage.
The result is that if an employee’s domestic partner or child is HSA-eligible and enrolled in family HSA coverage, both the employee and the domestic partner or child can each contribute the family HSA maximum ($7,200 in 2021) to their respective HSAs.
Note: A domestic partner or child is not HSA-eligible (i.e., eligible to make or receive contributions to their own HSA) if the they can be claimed as a dependent on the employee’s (or any other person’s) tax return. This eliminates the possibility of child contributions to an HSA in many instances.
- For more details, see our prior post: HSAs and Domestic Partners.
HSA Distributions for Family Members: Spouse
HSA owners can take a tax-free medical distribution for qualified medical expenses incurred by a spouse (same-sex or opposite-sex) regardless of whether the spouse is HSA-eligible.
HSA Distributions for Family Members: Children
The HSA rules do not incorporate the ACA Age 26 rule providing that medical plans generally must cover children to age 26, and that coverage is non-taxable through the end of the year in which the child reaches age 26.
This means that a child must qualify as the HSA owner’s tax dependent under IRC §152, as modified by §223(d)(2)(A), to take a tax-free distribution for the child’s medical expenses. The child’s HSA eligibility is irrelevant for these purposes.
To meet the “qualifying child” tax dependent test, the child relationship must generally meet the following five requirements:
- Child Relationship: The employee’s biological child, adopted child (including legally placed for adoption), stepchild, or foster child (or a sibling, half sibling, stepsibling, or descendant of any of those individuals);
- Child Residence: The child must live with the employee for more than half the year (exceptions apply for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents);
- Child Age: The child must be under age 19 at the end of the year. If the child is a full-time student for at least five calendar months of the year, the child must be under age 24 at the end of the year. No age limit applies if the child is permanently and totally disabled;
- Child Support: The child cannot have provided more than half of his or her own support for the year; and
- Child Taxes: The child cannot file a joint return for the year.
The age limitation (under age 19, or under age 24 if a full-time student) is a significant and unfortunate limitation for HSAs in relation to virtually all over forms of health coverage and accounts. Multiple legislative proposals have sought to remedy this loophole, so there is at least some hope that Congress will address the apparent oversight in the near future.
- For more details on the test to be a “qualifying child” tax dependent, see IRS Publication 501.
HSA Distributions for Family Members: Domestic Partners
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 domestic partner’s HSA eligibility is irrelevant for these purposes.
To meet the modified “qualifying relative” tax dependent test, the domestic partner relationship generally must meet the following requirements:
- 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)).
- For more details on the test to be a “qualifying relative” tax dependent, see IRS Publication 501.
- For more details on how employees can use an HSA for a domestic partner, see our prior post: HSAs and Domestic Partners.
HSA Distributions for Family Members: Other Tax Dependents
Employees may also take a tax-free distribution from their HSA for the medical expenses of any other individuals who qualify as the employee’s tax dependent under IRC §152, as modified by §223(d)(2)(A).
- For more details on the individuals who may qualify as a tax dependent for these purposes, see IRS Publication 501 and IRS Publication 969.
- For more details on everything HSA, see our ABD 2020 Go All the Way With HSA Guide.
(6) Denial of deduction to dependents.
No deduction shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins.
(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 Notice 2008-59, Q/A-26:
Q-26. Are employer contributions to the HSA of an employee’s spouse (who is not an employee of this employer) excluded from the employee’s gross income and wages?
A-26. No. The exclusion under § 106(d)(1) is limited to contributions by an employer to the HSA of an employee who is an eligible individual. Any contribution by an employer to the HSA of a non-employee (e.g., a spouse of an employee or any other individual), including salary reduction amounts made through a § 125 cafeteria plan, must be included in the gross income and wages of the employee.
IRS Notice 2004-2, Q/A-18:
Q-18. What is the tax treatment of contributions made by a family member on behalf of an eligible individual?
A-18. Contributions made by a family member on behalf of an eligible individual to an HSA (which are subject to the limits described in A-12) are deductible by the eligible individual in computing adjusted gross income. The contributions are deductible whether or not the eligible individual itemizes deductions. An individual who may be claimed as a dependent on another person’s tax return is not an eligible individual and may not deduct contributions to an HSA.
IRS Publication 969:
Qualifying for an HSA
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
- You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage except what is permitted under Other health coverage, later.
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone else’s 2019 tax return.
An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual’s return whether or not the individual itemizes deductions.
Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.
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.
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).