Tag Archives: Children

Spending HSA Funds on Step Children

Overview

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:

You
Your spouse
Your dependents
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:

HSA-spend-on-spouse-children-step-children

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 EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

Secondary HSA Insurance for Adult Child

This question was sent in by HSA Edge reader Holly. Feel free to send in your own question.

I have an employee (who has Cigna insurance for himself and his family) whose daughter is now employed and has insurance of her own. He would like to leave her on his plan until she turns 26 in October. She would then have her insurance as her primary and dad’s insurance as secondary. Is this allowed?

Parent with Adult Child with Secondary Insurance

Let’s address this from two perspectives: for one, I see no problem for the employee to have his daughter on his health plan. Assuming he has an HDHP, he is eligible to contribute to an HSA using the family contribution limit, even if the daughter has duplicate coverage. He can carry on and has no risk here. This is confirmed by one of my favorite clauses of Form 969:

Self-only HDHP coverage is an HDHP covering only an eligible individual. Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual whether or not that individual is an eligible individual).

Adult Child with Secondary Insurance

As for the daughter, I don’t think anyone is stopping her from having multiple health insurance plans. And it is true that adult children on their parent’s HSA can open their own HSA. That is a great feature and allows them to contribute a lot.

Even if she has HSA eligible insurance, there is a further test. In order to contribute to an HSA, you need to be an eligible individual. Per Form 969:

HSA-what-is-an-eligible-individual

Notice #2 above. Her “other” coverage, whether it is the primary or secondary, almost certainly does not fall into the exceptions listed in Form 969. Thus, with 2 health insurance plans, she would violate the “Other Health Coverage” provision. She would not be an eligible individual with dual coverage, and would be unable to contribute to the HSA during those months with dual coverage.

Over contribution

Note that contribution limit is pro rata by month. For example, if she enrolls for 3/12 months on 1 insurance plan, she earns 3/12 of the contribution for the year. When she joins that second plan for say the remaining 9/12 months, she doesn’t earn contribution limit for those months. But she would still be able to contribute the 3/12 or 25% of her limit.

If this situation existed in 2018 and she made contributions, she likely over contributed, and has until tax day to remove any excess contributions and get her taxes corrected. If it is a current year situation, she can correct it up until tax day next year.

If she is keen on the HSA I would avoid the 2nd plan.

Note: If you want help calculating your HSA contribution limit and filing your taxes, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

Who Needs to File Form 8889?

In order to take advantage of the many tax benefits of Health Savings Accounts, there is a tax reporting requirement that occurs each year. When you file your taxes via TurboTax, H&R Block, etc., you are required to report HSA information on Form 8889, the IRS tax form for HSA’s. It is a slightly annoying, overly-engineered two page tax form that is required for those with transactions in their HSA during the year. As you will see, there are multiple scenarios that can cause confusion on who needs to file this form. Hopefully we address them all and provide clarity on your situation.

HSA Transactions require Form 8889

You need to file Form 8889 for the year if transactions occurred in the HSA. What are transactions? These include:

Contributions made to HSA
Distributions from HSA
Penalties for failing testing period
You acquired HSA due to death of beneficiary

If any of those apply to your HSA this year, you need to file Form 8889 with your taxes. On the other hand, if your HSA sat idle during the year, you do not need to file Form 8889. A common example of this is you 1) no longer have HSA eligible insurance, so are not contributing to the HSA and 2) you did not make any distributions from the HSA this year. If you make distributions (or contributions) in the future, you would file the form with that tax year.

Preparing Form 8889 for family coverage

To summarize who needs to file Form 8889:

File Form 8889 for each person with a Health Savings Account that had transactions during the year.

Notice the “each person with a Health Savings Account” part. This means each person with a Health Savings Account; you know, like a bank account that exists at a financial institution. If both you and your spouse have a Health Savings Account, and you made contributions or distributions to either during the year, you each need to file separate Form 8889’s.

This is important because Form 8889 reflects the tax benefits (and penalties!) associated with the HSA itself. For a family with 2 HSA’s, the two Form 8889’s will total your combined activity for the year. For example, a $6,900 contribution limit resulted in $3,000 contributed to HSA 1 and $3,900 was contributed to HSA 2, etc. Both of these need to be reported.

Why do you need to file 2 Form 8889’s in that scenario? It is because of the magic “Line 6” split for married couples with separate HSA’s.

Spouses who have separate HSA’s and family coverage “split” the contribution limit.

This means that with family coverage and 2 HSA’s, each HSA is receiving an allocation of the HSA contribution limit. While you are allowed to make this allocation however you want (save for the 55+ catch up contribution), each HSA receives an allocation. The result is you cannot file one Form 8889 and capture the tax implications, as even “$0” needs to be reported.

Form-8889-Line-6-family-hsa-contribution-split

[Note: the Line 6 split is especially complicated. If you don’t want to read the 1+ pages of IRS instructions, have EasyForm8889.com take care of it for you.]

Below is a review of common scenarios and how Form 8889 must be filed.

1) What if my spouse and I have family coverage?

If you were on family coverage during the year, you need to file Form 8889 for each HSA that existed and had transactions. If only you have an HSA, and the full contribution limit went into it, you only need to file one Form 8889 reporting those transactions. On the other hand, if both you and your spouse have an HSA, and you split the contribution limit per Line 6, you both need to file a Form 8889.

2) What if my spouse has their own HSA?

If your spouse has their own HSA, you will need to file a Form 8889 for it. Again, this assumes transactions occurred in the HSA during the year. Alternatively, if the HSA just kind of sat there, and no contributions nor distributions occurred, you do not need to file Form 8889 for it.

3) What if my adult child has their own HSA?

A nice loophole of HSA’s is that adult children on family coverage can open their own HSA. This allows them (or you, or others) to fund a substantial amount each year. The minor downside here is they will need to file a Form 8889 for each year transactions occur. So this is an additional form to file, potentially a 3rd (or 4th!) if both spouses have an HSA.

4) What if my spouse is 55 or older?

One specific rule about the 55+ catch up contribution of $1,000 is that it must follow the person who is over 55. This means that if you are over 55, and you want to take advantage of the 55+ contribution, the $1,000 needs to go into your HSA. You cannot place your $1,000 into your partner’s HSA.

For example: say the husband is 56 years old on family coverage but the insurance and HSA are in the wife’s name. His $1,000 cannot go into her HSA. Instead, the husband needs to open his own HSA and contribute the $1,000 (and any Line 6 “split” of the family contribution limit) there.

5) What if my spouse and I are both 55 or older?

As you might guess from the previous scenario, each spouse who is over 55 needs their own HSA if they are going to take advantage of the 55+ contribution. For couples on family coverage who are both over 55, this means you need 2 HSA’s to fully maximize your contribution. This maximum would equal the family contribution limit plus $1k for spouse and $1k for other spouse. Opening the HSA should not cost you anything. It is a little annoying to file the additional Form 8889, but this is the only way to maximize your 55+ contribution for the year.

Note: If you want help preparing any of your HSA tax forms this year, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.