Can Your Child's Coverage Affect Your HSA Eligibility? No.

by William G. (Bill) Stuart | Originally posted on LinkedIn for your Health Savings Academy

Some family members' coverage can affect your eligibility to fund your Health Savings Account. But not a child's coverage. Almost always.

Employees must meet eligibility requirements to enroll in employer-sponsored benefits. Those eligibility requirements may range from being a full-time employee to having worked at the company for several months. In nearly all cases, these requirements are independent of coverage in which anyone else in a worker's family participates.

There is one glaring exception: eligibility to open and fund a Health Savings Account. The issue is that some family members' coverage automatically covers other family members, whether or not everyone in the family understands. Most often, a spouse can disqualify the other spouse, usually by enrolling in one specific plan. A parent can occasionally disqualify a child.

But can a child disqualify a parent? I can't think of a scenario. But I invite you to think of such a situation.

Spousal Coverage

In most cases, employees enroll family members - spouses and tax dependents - in their medical, dental, and vision coverage. Thus, it's clear who is and isn't enrolled in a plan.

For example, if a spouse is enrolled in Medicare Part A, that coverage doesn't affect anyone else in the family because Medicare issues family coverage only.

Example: Ali covers herself and her husband Bud on her company's HSA-qualified plan. Bud receives Social Security benefits and thus is automatically enrolled in Medicare Part A. Doug is disqualified from funding his own Health Savings Account. But note that Ali isn't disqualified. She can contribute up to the family contribution limit (because the ceiling is based on contract size, not how many family members covered meet Health Savings Account eligibility requirements) and reimburse all of Bud's qualified expenses tax-free from her account.

The exception is a Health FSA. These employer-sponsored reimbursement plans are governed by federal tax law. They automatically cover not only the employee, but also the employee's spouse, tax dependents, and children until the end of the year that they turn age 26. Employers can narrow the list of eligible family members, but they rarely do.

Note that a Health FSA is separate from a comprehensive medical plan. The family members listed above are covered by a Health FSA, even if the employee has waived medical coverage through her company or enrolled only certain family members.

Example: Sue Ellen and John are each covered by a self-only plan through their respective companies - Sue Ellen a plan with a low deductible and John an HSA-qualified plan. Sue Ellen also participates in her company's general Health FSA. John plans to continue funding his Health Savings Account, but Sue Ellen's general Health FSA disqualifies him - even though he's not covered on Sue Ellen's company's medical plan.

A general Health FSA - the most popular design, and the only design before the introduction of Health Savings Accounts - is disqualifying because it provides first-dollar (no deductible) reimbursement for qualified medical expenses. This violates the rule that when an individual is covered by more than one medical plan, all plans must have an HSA-qualified design to preserve eligibility to fund a Health Savings Account.

If the plan is a Limited-Purpose Health FSA - which reimburses dental and vision expenses only and isn't disqualifying - anyone covered by the plan who's otherwise HSA-eligible can fund a Health Savings Account.

There may be some other more obscure forms of coverage that disqualify family members other than an employee, such as an Employee Assistance Program that covers more than de minimus medical services or a company clinic that's open to family members and offers free diagnostic services and treatment.

Parental Coverage

Children who want to open and fund a Health Savings Account generally aren't disqualified by a parent's medical plan. Medicare, for example, issues self-only coverage exclusively, so a child can't draw reimbursement from a parent's Medicare coverage.

Also, if the child isn't enrolled on a parent's medical coverage, that plan won't reimburse any of the child's expenses. Children can be added or dropped from a parent's coverage during the annual open-enrollment period and may be dropped during the year (but added only with a qualifying event).

The one danger area is a general Health FSA. Absent an employer exception, a child is covered by the general Health FSA and thus disqualified from opening and funding her own Health Savings Account.

Example: Ali, age 25, lives independent of her parents. She enrolled in her company's HSA-qualified plan, received a lump-sum employer contribution at the beginning of the plan year, and set up pre-tax payroll deductions to contribute a portion of her pay to the account. But her mother participates in her company's general Health FSA to pay for her prescription drugs and scheduled restorative dental work. Ali is automatically eligible for reimbursement from that plan due to her age.

Ali can't escape coverage through her mother's Health FSA. She can't individually elect not to be covered. She can't opt out by signing an affidavit stating that she won't seek reimbursement. She can't simply ignore this coverage and continue to fund her Health Savings account. She is not HSA-eligible until the end of her mother's Health FSA plan year (or perhaps later, if the plan includes a grace period or carryover of unused funds).

Note that if the parent's plan is a Limited-Purpose Health FSA, the covered child isn't disqualified from funding her own Health Savings Account. Thus, in our example above, if Ali's mom's Health FSA is limited-purpose, Ali (and her mom), if otherwise eligible, could each fund their respective Health Savings Accounts.

Child Coverage

A child's coverage, in contrast, almost never disqualifies an otherwise HSA-eligible parent. Here are the most common scenarios where the child has coverage independent of the parent:

Disabled child on Medicare. The child's enrollment in Medicare disqualifies her from funding her own Health Savings Account. But because Medicare issues only one-person policies, no parent or other family member can receive reimbursement through the child's Medicare policy. As an aside, if the child remains the parent's tax dependent and the parent owns a Health Saving Account, the parent can reimburse the child's qualified expenses tax-free from the parent's account. A child (or spouse) doesn't have to be HSA-eligible herself for her qualified expenses to be reimbursed tax-free from a parent's/spouse's Health Savings Account.

Adult child participates in her own general Health FSA. This general Health FSA would, unless her employer limits participation, cover the child, her spouse, and her tax dependents. Not parents. The only issue is if the parent is a tax dependent. In these cases, the parent generally isn't trying to meet eligibility requirements to fund a Health Savings Account.

Example: Juan's elderly mother lives with his family. He provides most of her support (her meager Social Security payment is her only income), so she qualifies as his tax dependent. He can reimburse her qualified medical expenses through his general Health FSA.

Juan's mother is already barred from funding her own Health Savings Account because she qualifies as another taxpayer's tax dependent under Section 152 of the federal tax code. Juan can reimburse her qualified expenses tax-free from his Health Savings Account because his mom is his tax dependent. But she can't fund her own account.

Are There Exceptions?

It's sometimes possible to concoct scenarios in which a series of very unlikely events collide to create an exception to a rule. My challenge to readers this week is to create such a situation. I've tried and eliminated some scenarios…