Tag Archives: Health Insurance

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.

Can Spouses Have Both an HSA and FSA?

This question was submitted by HSA Edge reader Eugenia. Feel free to submit your question today to evan@hsaedge.com.

My husband and I have different employers, and we would like to use an HSA and FSA. This November is an open enrollment for Health Insurance for 2018 and my husband plans to enroll in an HDHP Plan with self only coverage. Since my employer does not offer an HDHP, I will enroll myself and my son a PPO plan. Can we have both FSA medical and HSA? Since my husband’s insurance is self only coverage and my insurance is self and child only coverage. And how can my husband open the Health Savings Account?

You are correct in questioning the same year FSA and HSA contribution. Unfortunately, the IRS has deemed that FSA coverage extends tax benefits to family members as well. This is because an FSA holder can deduct medical expenses that occur for themselves, their spouse, and their dependents. This also applies inversely for HSA’s since they can deduct expenses for their family. This combination of two tax advantaged programs is a no-no as it violates the “No Other Health Coverage” clause of the HSA. (see Qualifying for an HSA).

Do note that there are some types of Flexible Spending Accounts that are compatible with HSA’s, such as Limited Purpose FSA’s and Post Deductible FSA’s. However, these are not as common as your regular FSA’s and they must be explicitly stated as such. Thus, it is up to the family to choose the HSA or FSA to avoid double coverage. You cannot have both. In making a decision, see this article regarding Choosing between an HSA and FSA.

As for opening an HSA, as long as your husband has a qualifying High Deductible Health Plan, he can open an HSA at whatever financial institution he wants. Here is a similar situation involving Opening an HSA when Your Employer does not Offer One. It is pretty easy. I suggest comparing banks that offer the lowest fees and best investment options to make a choice.

When it comes to contributing to the HSA, your husband can directly contribute to his HSA instead of taking salary deductions. This will be done with post-tax dollars, so he just writes a check to the Health Savings Account. Come tax time, when you file Form 8889, it will reduce your taxable income by the contribution amount, making those contributions tax free. However, do note that there is one disadvantage of contributing directly to the HSA, which is additional Social Security / Medicare taxes are paid. If you withhold the contributions from your paycheck, you never pay those extra taxes. If you contribute the post-tax money, you will have paid those taxes, but only get back the federal income tax you paid. It might not matter.

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Health Savings Accounts – the Pros and Cons

Overview

A frequent question those considering Health Savings Accounts often ask is, “What are the Pro’s and Con’s of HSA’s”? There are many different aspects of HSA’s that may benefit your particular situation, but there are some disadvantages as well. To clarify the issue, we have summarized the pro’s and con’s of Health Savings Accounts in a digestible format. Hopefully this information can help you decide if participation in HSA insurance is right for you.

The Pro’s of HSA’s

There are many reasons that Health Savings Accounts are beneficial and can help your family financially. Enrolling in HSA eligible insurance and opening a Health Savings Account can offer you the following benefits:

Lower Insurance Premiums

A core tenant of High Deductible Health Plans (HDHP’s) is a trade off of lower monthly premiums in exchange for a higher deductible. This reduces guaranteed costs (premiums) at the expense of occasional costs (deductible). This benefits healthy individuals and those that can pay for limited out of pocket care.

Lower Cost of Health Care

Part of the HSA’s triple tax advantage is that qualified medical expenses are paid on a tax free basis. The actual mechanism occurs first through tax free contributions to a Health Savings Account, then spending those dollars on qualified medical expenses. By not paying tax on healthcare, you reduce your cost by your marginal tax rate, which can be 15%, 25%, or 35%.

Lower Taxes

HSA’s are an effective vehicle to lower your income tax burden. For those in strong financial standing, they can allocate part of their income to an HSA instead of paying full taxes on it, creating a nest egg and lowering that year’s taxable income.

Keep the Money Forever

Unlike Flexible Spending Accounts (FSA’s) whose contributions expire at year end (the horror!), anything you contribute to your HSA remains yours for life. There is no need to operate under a “use it or lose it mentality”. This makes an HSA an investment since it becomes savings that you can spend as you see fit.

Get Started Quickly

Unlike other health plans and savings vehicles, you can open Health Savings Account very quickly. It does not require much paperwork or employer approval; all you really need are an HDHP and an account with a financial institution. Moreover, in the first year you can utilize the Last Month Rule to contribute the max amount, even if you only had partial year insurance.

Retirement Investment Vehicle

A major benefit of HSA’s occurs when the account holder turns 65, at which point HSA funds can be spent on anything without penalty. This differs than prior to age 65, when using HSA’s for non qualified medical expenses invokes both tax and penalty. Note that HSA funds spent on non qualified medical expenses will be taxed (like a 401(k)) but not penalized. However, the benefit is they would have grown tax free in your HSA. That means you can save diligently through your working years, spend what you need on medical, and use the rest to pad your retirement account.

Unemployment Safety Net

Health insurance premiums are generally not considered a qualified medical expense. However, if you are collecting government unemployment benefits, you are allowed to spend your HSA on health insurance premiums during that time. That means your HSA can function as your own unemployment insurance and help you through difficult times after losing a job.

Employer Contributions

If you are so lucky that your employer makes contributions to employee HSA’s, you may be able to receive some of that free money by signing up an HSA. This incentive can factor into your calculation when determining what type of insurance to buy.

The Con’s of HSA’s

Even though there are many positive aspects of HSA’s, there are some Con’s as well. Generally these involve the insurance itself and the IRS rules surrounding the account mechanics. Either way, it is important that you are aware of the following when making a decision about HSA’s.

Reduced Insurance Choices

Since not all insurance plans are HSA eligible, if you want an HSA you will be restricted to a subset of health insurance plans. These plans may or may not fit all of your health care needs, so be sure that your needs are being met by the insurance. In that regard HSA eligibility may be a “bonus” or a secondary factor in deciding which insurance to purchase.

Higher Deductible

The increased deductible required by HDHP’s is a reality that can cause financial hardship. It is not fun to have to spend $X,000 before your insurance kicks in, and the higher the number, the more you spend first. That is why if you have high medical costs an HDHP may not be the best fit for you.

Money tied up for Health Care

One downside of HSA contributions is that they are illiquid. Once they have been contributed, they are designated for medical expenses and nothing else. This can cause financial issues when you have a bunch of money in your HSA but have a non-medical need for the cash. There are a few ways to cash out an HSA but they often involve taxes and penalty.

Risk of Penalty and Fines

There are quite a few rules that govern the use of HSA’s, and some of them are very specific and (dare I say) onerous. By using an HSA you receive benefits but run the risk of putting yourself in a position to actually pay penalties if something goes wrong. The most common cause of fines is the Last Month Rule, so it is in your interest to familiarize yourself with it and other HSA rules.

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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 may be.