Adult Children and HSAs

Due to the passage of health care reform, many more “adult children” will now be eligible for coverage under their parents’ group health plans, including high-deductible health plans  (HDHPs) coupled with Health Savings Accounts (HSAs). However, just because an adult child is covered under a parent’s HDHP does not mean that the child’s expenses can be reimbursed from the parent’s HSA. In fact, the adult child’s eligible medical expenses CANNOT be reimbursed on a tax-free basis through the parent’s HSA unless the adult child qualifies as a dependent of the parent. So, even though the dependency tests no longer matter for determining whether the adult child can be covered under the parent’s HDHP or other group health plan, dependency is still required for tax-free reimbursement of HSA expenses. For this purpose, an adult child will meet the dependency test if he receives over half of his financial support from a parent.

If an adult child does not meet this dependency test and cannot have his expenses reimbursed through his parent’s HSA, the next logical question might be whether he can  open his own HSA. The rules for this are slightly different. In this case, the adult child can establish his own HSA as long as he does not meet the Internal Revenue Code’s definition of “qualifying child” or “qualifying relative.” An adult child who is financially independent would meet this requirement. However, even an adult child who receives over half his financial support from a parent could meet this requirement if he makes more income than the gross income exemption amount (currently $3,650). In this case, the adult child could open his own HSA.  Because the HSA is connected to family HDHP coverage (through the adult child’s parent), it appears the child could contribute up to the full statutory HSA contribution limit for family HDHP coverage to his HSA. This is true even if the parent also has his own HSA linked to the same family HDHP coverage. However, this appears to be an unanticipated “windfall” and it will be interesting to see whether the IRS issues guidance prohibiting this practice.

Today’s post was contributed by Maureen Maly and Cynthia Lee.

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