Your Spouse and Your Health Savings Account

by William G. (Bill) Stuart, originally posted here

Spouses create opportunities and challenges for Health Savings Account owners.

Although Health Savings Accounts are personal financial accounts, they do affect the family. And the family can affect the account. Let's examine how a spouse can boost the benefits that you derive from your Health Savings Account . . . or derail your best-laid financial plans.

Spousal Disqualification

Your spouse's benefit may disqualify you from opening and funding an account, even if you're covered on an HSA-qualified medical plan.

The most common example is a spouse's general Health FSA. These popular work-based programs are governed by federal tax law, which states that family members whose qualified expenses can be reimbursed include the subscriber (your spouse), the subscriber's spouse (you), the subscriber's tax dependents (like children and perhaps an elderly parent or other relative), and children to age 26.

That means that your spouse's general Health FSA covers you. . . Even if you don't want to be covered. . . Even if you never submit a claim for an expense that you incur. . . Even if your spouse waives his or her employer's medical coverage.

This coverage can be a knock-out blow if you don't understand the implications and coordinate benefits with your spouse.

A far less common example is when you're enrolled in an HSA-qualified plan, but your spouse also enrolls in coverage, that plan isn't HSA-qualified, and your spouse adds you to that plan. This scenario rarely occurs today, as the cost of coverage discourages both spouses from subscribing to coverage.

Otherwise, your spouse's coverage decisions don't affect your eligibility to open and fund a Health Savings Account. Your spouse's enrollment in Medicare or TRICARE, or your spouse's receiving care through the Veterans Administration or Indian Health Services, or your spouse's participation in a direct-primary care arrangement don't disqualify you from opening and funding an account. These situations disqualify your spouse from contributing to his or her account, but not you.

Contract Size and Contribution

If you're enrolled in family coverage, you can contribute up to the statutory maximum annual contribution for a family contract, which is $7,100 in 2020. This limit applies even if you're the only person on the contract who's HSA-eligible.

This is an important concept that often confuses people. Let's say you cover your spouse and you on your HSA-qualified plan. You're eligible to open and fund a Health Savings Account. Your spouse is also enrolled in Medicare. That Medicare coverage disqualifies your spouse. But Medicare issues only individual policies. You can't receive benefits from your spouse's Medicare coverage. So, it doesn't affect your opportunity to fund your own account.

Contribution limits are based on the size of the contract alone, not how many family members are HSA-eligible. So, you can contribute to the family maximum, even if your spouse is disqualified.

Spouse and Catch-Up Contributions

If you're enrolled on your employer-sponsored coverage, you probably contribute through pre-tax payroll deductions to maximize your tax benefits. That's the right strategy nearly universally.

Your spouse, if HSA-eligible, could open an account, and your spouse or you - or anyone else for that matter - could contribute to that account. Your spouse, as the account owner, could deduct those contributions to reduce his or her federal and state (except in California and New Jersey) taxable income. But this funding strategy doesn't reimburse federal payroll taxes (7.65% on incomes below $137,700 and 1.45% on incomes above that figure). So, it usually makes sense for the spouse who's the plan subscriber to contribute through payroll deductions (which aren't subject to the payroll tax).

But beginning in the year that an HSA-eligible spouse turns age 55, he or she can make a $1,000 catch-up contribution annually. But your spouse must open his or her own Health Savings Account. You or anyone else can contribute to your spouse's account, but you can't make deposits through pre-tax payroll deductions from your paycheck.

Your spouse's company may allow him or her to make pre-tax payroll deductions. But this situation is rare, and occurs only when your spouse's employer offers a Health Savings Account program to its employees and has included a provision in its Cafeteria Plan allowing payroll deductions for employees who are covered by an HSA-qualified plan that the company doesn't sponsor.

Even without the payroll-deduction advantage, taking advantage of the catch-up contribution generally makes sense financially. It's another $1,000 reduction in taxable income, which saves a typical taxpayer between $170 and $300 annually in federal and state income taxes (or about $120 and $240 for residents of states that don't impose income taxes).

Spouses and Distributions

Distributions for your spouse's qualified expenses are always tax-free. Your spouse doesn't have to be HSA-eligible; he or she can be enrolled in Medicare or other disqualifying coverage. Your spouse doesn't have to be covered on your medical plan. your spouse doesn't need to share a bedroom with you.

But beware of one little quirk in the law, especially if your spouse is older than you. You can't reimburse your spouse's Medicare premiums until you turn age 65. You can reimburse your spouse's Medicare deductibles, coinsurance and copays; your spouse's unreimbursed dental and vision expenses; and your spouse's over-the-counter drugs, medicine, equipment, and supplies with tax-free distributions from your Health Savings Account. But you can't reimburse your spouse's Medicare premiums until you - the account owner - turn age 65. And when you turn age 65, you can't retroactively reimburse your spouse's Medicare previous premiums.

That's why it might be prudent to open a Health Savings Account in your spouse's name and make catch-up contributions - to set aside tax-free funds to pay your spouse's Medicare premiums until you turn age 65 and can reimburse them from your account.

I'm director of strategy and compliance at Benefit Strategies, LLC, a provider of Health Savings Accounts and other tax-advantaged benefits. You can read my biweekly Health Savings Account GPS blog and subscribe by clicking here and my biweekly HSA Monday Mythbuster and occasional Healthcare Update column published on LinkedIn. I also launched your Health Savings Academy, a company that focuses on education. My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, Medicare, and retirement planning. It's available in book and e-book forms from Amazon.

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