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Funding an HSA for a Health Plan Dependent

Did you know that you can fund a separate HSA for a health plan dependent as long as they are not one of your tax dependents? Here's why you might want to do that--and how.

Your HSA can pay the health costs for any of your tax dependents, even if they are not covered under your health insurance plan. However, they can't be used for anyone you don't claim as a dependent on your taxes, such as a child who has turned 18 and is not a full-time student. In this scenario, you may still want to support the family member with their health costs. In some cases, you can fund another HSA to help the dependent with those costs.

And, you can contribute up to the IRS family HSA contribution maximum for this additional account.  

That means, you could fund your HSA up to the family maximum, and your health plan dependent's HSA also up to the family maximum.

Why

Even if you can't save up the family maximum for both accounts, contributing something to an HSA that your health plan dependent can use has many benefits.

With rising health costs in America, it is more important than ever to proactively save for the unexpected. Establishing an HSA for someone who just became (or is about to become) financially independent is a good way to:

  • Teach financial awareness
  • Provide a safety net for any unforeseen injuries or illnesses for years to come (this can be especially helpful if their budget is tight)
  • Set them up with funds they can keep for as long as they want, even after they come off your insurance plan 

Your health plan dependent can continue to fund the account themselves if they establish coverage under an HSA-qualified health plan.  

We haven't listed tax deductions as a reason for setting up an HSA for a health plan dependent. That's because under IRS law, the plan is theirs, which means that only they can claim contributions to this account, even if you provided the funds.  

Who

If you want to fund a second HSA for a family member, they must be covered as a dependent under your HSA-qualified health insurance plan. They must also meet the same requirements you had to meet before you could open your HSA. These include:

  • You cannot be claimed as a tax dependent by someone else
  • You cannot be enrolled in Medicare or Tricare.
  • You cannot be covered under a health plan (as an individual, spouse, or dependent) that is not an HDHP
  • If you are also covered by a medical flexible spending account (FSA), it must be a limited FSA, covering only vision and dental expenses.
    This applies even if the FSA is in your spouse's name.
  • If you are also covered by a health reimbursement arrangement (HRA), it must be a limited HRA, covering only vision and dental expenses.
    This applies even if the HRA is in your spouse's name.

If you are not sure if your plan is HSA compatible, please contact your insurance company. 

When

If keeping a health plan dependent under your coverage and funding an HSA for them makes sense for your family, note that doing this for a few years gives you more time to build this safety net of funds for them. 

Now, let's cover the rules on timing: 

When is my family member eligible for their own HSA? 

Per the IRS, changes to a person's tax dependent status take place on the first day of the following month. You can find the IRS rules around tax dependent status on their website. Keep in mind you MUST keep this family member covered by your HSA-qualified health plan.

When can you open the HSA?

You can't establish an HSA mid-month, so when you apply, the HSA will be considered established the first day of the following month--as long as you allow for enough processing time. Processing an HSA application typically requires 7-10 business days. Is that right?

When must you stop contributing to the HSA?

When your family member is removed from your health plan coverage, this change will be effective in the eyes of the IRS on the first day of the following month. As of that day, you cannot contribute to their HSA any more. However, the funds that are already in the HSA are available to your family member for as long as they want. They can also continue to contribute to the HSA if they get coverage from another HSA-qualified health plan.

How 

We recommend opening the account together with your health plan dependent. Before you begin, here are some important requirements to keep in mind:

  1. You or your health plan dependent will be responsible for all fees associated with the HSA. More on that later.
  2. In order to be compliant with IRS law, the account must be opened in your health plan dependent's name. They must open this HSA as an individual. This is true even if your HSA is employer-sponsored.
  3. The contributions you or your health plan dependent make will not be payroll deductions, so they will occur after income tax has been taken out. Your health plan dependent can claim these contributions on their tax returns, but you cannot.

Step 1 - Determine which HSA plan is right for you

You can find a list of available Further® HSA plans on this page, by clicking the For Individuals tab. You'll want to compare the following: 

  • Administrative Fee: You and/or your health plan dependent are responsible for the fees associated with their HSA. If you received your HSA through your employer, they might have chosen to cover your administrative fees for you. That won't be the case with this secondary HSA.
  • Credit Ratings: Your dependent can earn interest on their HSA funds. The interest rate used is based on the balance of the HSA.

Step 2 - Apply for the HSA

You can do this by following these steps:

  1. Access the HSA Application and click Start Application.
  2. Fill out the Personal Information form. At the bottom, be sure to leave both check marks cleared. Even though your employer may sponsor your HSA, the employer is not sponsoring the HSA for your health plan dependent.  
  3. Fill out the Contact form--remember to enter the health plan dependent's information.
  4. Fill out the Account form.
    • The Health Plan Effective Date should reflect the date when coverage began for this current tax year for this dependent.
    • The HSA Effective Date can be the next business day. 
    • HSA plan
  5. Fill out the Banking form. This is the bank where reimbursements will be sent, so this should be your health plan dependent's personal bank account.

Step 3 - Fund the HSA

This HSA is not activated until a contribution has been deposited. Your health plan dependent cannot use this account for any costs that occur before it is activated. This means that if they sprain their wrist in a snowboarding accident, unless you (or they) have previously deposited funds into the HSA, they can't use to pay for the medical costs tax-free. 

You have a few options:

  • Make a one-time contribution
  • Make a recurring contribution

If you are helping the health plan dependent open this account mid-year, keep in mind that you'll have to prorate the contributions so you don't go above the IRS contribution limit. To discover how much you can contribute this this account, figure out how many months out of the current plan year the dependent will have this account. 

 

You can contribute up to the IRS family HSA contribution maximum to that health plan dependent's account. The dependent can fund this account, too, but all contributions for the tax year must be below the IRS family maximum.

The dependent can receive tax deductions on all contributions made to the account (both yours and any contributions they make). The IRS requires them to report the contributions on Form 8889 when filing their tax returns.

 

 

What happens when they are no longer covered (either they turn 26 or they get their own coverage)