Subscriber's Not HSA-Eligible. Can a Spouse Fund an Account? Let's See . . .

Eligibility to open and fund a Health Savings Account is determined person-by-person, which may open opportunities for couples to continue to contribute.

It's open-enrollment season at your company. You've studied your options carefully. You've concluded that you don't meet the eligibility requirements to open and fund a Health Savings Account. So you move on to consider other (more expensive) coverage.

Wait! Your company's information packet probably doesn't include the information below. If you're attracted to the idea of enjoying tax savings, building a balance to cover an unexpected medical expense in the near future, or preparing yourself for greater financial security in retirement, take your analysis one more step to determine whether your family can still participate in the Health Savings Account program.

You might be pleasantly surprised.

Eligibility to Open and Fund a Health Savings Account

To be HSA-eligible (a term that means that someone can open and fund a Health Savings Account), an individual must meet three requirements:

1. Be enrolled in an HSA-qualified medical plan.
2. Not be covered by any disqualifying plan. The most common issues are enrollment in Medicare or coverage through a general Health FSA (including a spouse's or parent's). See below for more information.
3. Not qualify as another taxpayer's (typically a parent's) tax dependent.

Note the absence of a requirement that an HSA-eligible person must be the medical-plan subscriber. That's not an oversight. Each family member covered on an HSA-qualified plan may be HSA-eligible, depending on whether he or she passes the three-part eligibility test above.

Also note the absence of a requirement that the plan be employer-sponsored coverage. Health Savings Accounts aren't tied to employment, as are two common medical-reimbursement accounts, the Health FSA and the Health Reimbursement Arrangement. That's because a Health Savings Account is a personal financial account, not an employer-sponsored reimbursement program. Thus, a sole proprietor, an unemployed person, or an early retiree can purchase an HSA-qualified plan in the nongroup market and become or remain HSA-eligible.

When the Subscriber Is HSA-eligible

Usually, the plan subscriber meets eligibility requirements. That's particularly important (but not critical) when the coverage is employer-sponsored. Employees who enroll in an HSA-qualified plan and are HSA-eligible can fund their accounts with pre-tax payroll deductions through a company's Cafeteria Plan (a feature that most, but not all, employers offer). These contributions are free of federal income and payroll taxes, plus state income taxes in all states except California and New Jersey. Absent the Cafeteria Plan option, post-tax personal contributions can be deducted from federal and state (with the two exceptions above) income taxes. But there is no method of eliminating or reclaiming federal payroll taxes (7.65% on the first $147,000 of income in 2022, then 1.45% on earnings above that threshold).

Also, most companies offer an employer contribution to help employees offset their out-of-pocket expenses. Employers usually limit these contributions to employees enrolled in the employer-sponsored plan. Some companies do offer the contribution to a spouse's Health Savings Account when the employee isn't HSA-eligible, but these deposits aren't common and are post-tax (but deductible for the recipient).

When the Subscriber Isn't HSA-eligible

In most cases, the subscriber-isn't-HSA-eligible scenario doesn't exist because employees usually don't enroll in coverage when they can't take full advantage of the program that the company offers. But sometimes it does happen. Here are some common scenarios:

Medicare: An employee turns age 65 and enrolls in Medicare Part A (perhaps because h e's collecting Social Security, or maybe his brother-in-law or auto mechanic told him - incorrectly - that he'll face an automatic penalty if he doesn't enroll at age 65. He's disqualified from making or receiving additional Health Savings Account contributions once he's enrolled in any Part of Medicare - even if he remains covered by the company's HSA-qualified plan.

General Health FSA: An employee enrolls in her company's Health Savings Account program and is looking forward to receiving the company's front-loaded contribution. But her spouse is enrolled in his company's general Health FSA for six more months, through the end of the Health FSA plan year. That general Health FSA automatically covers her and is disqualifying, even though she's not covered on her husband's medical plan and even if she doesn't seek reimbursement for her qualified out-of-pocket expenses from his Health FSA.

TRICARE: An employee enrolls in her company's HSA-qualified medical coverage. She is a veteran who's entitled to continue her TRICARE plan that covered her when she was on active duty. Many retired military personnel retain this coverage because it's inexpensive and can fill any time gaps in commercial coverage - for example, when she is between jobs. TRICARE doesn't offer an HSA-qualified plan design, so this coverage automatically disqualifies her from opening and funding a Health Savings Account.

Examining Other Family Members' Eligibility

In some cases, a disqualified subscriber doesn't shut the family out of the benefits of a Health Savings Account. Let's look at each of the scenarios above to see how the family can still earn tax savings, fund an emergency medical account, and prepare for medical expenses in retirement by funding an account.

Medicare

Medicare issues self-only contracts only. Thus, the employee's enrollment doesn't affect any other family member's Health Savings Account eligibility. If a spouse passes the three-part test above. the spouse can open her own Health Savings Account. Since she's covered by a family plan, she can fund her own account to the family limit ($7,300 in 2022, increasing to $7,750 in 2023). That's right - she can fund her account to the family limit, even though she's the only family member who's HSA-eligible. The contribution level is determined by the size of the contract, not how many covered family members are HSA-eligible.

In this case, she can't contribute to her account with pre-tax payroll deductions through her husband's company's Cafeteria Plan. Her husband also can't use his company's Cafeteria Plan, since the payroll deductions don't go into his Health Savings Account. But they can deposit after-tax funds into her account and then deduct those contributions when they file their personal income tax return.

He can even make post-tax payroll deductions from his paycheck into her Health Savings Account if his company's payroll system is flexible enough to allow his paycheck to be allocated among multiple financial accounts. His wife's Health Savings Account is just another financial account with an account number and routing number. The employer doesn't treat this money as a Health Savings Account contribution, but rather as a portion of his paycheck directed to a financial account. The couple then capture the tax benefits when they file their joint income tax return.

General Health FSA

A general Health FSA disqualifies all family members who might otherwise be HSA-eligible from opening and funding a Health Savings Account. Thus, in this situation, both spouses have disqualifying coverage. Neither can open an account, nor can either make or receive contributions, until the general Health FSA coverage ends (at the end of the Health FSA plan year - or perhaps later if the plan has a grace period or carryover provision).

Once the couple are no longer disqualified by the general Health FSA and meet all other eligibility requirements, they can begin to fund a Health Savings Account. Usually it makes sense to open the account in the name of the employee through his company to qualify for employer contributions and to make pre-tax payroll deductions through the company's Cafeteria Plan.

TRICARE

This scenario may or may not have a happy ending. It depends on whether the TRICARE coverage is self-only or family.

If the veteran covers only herself on TRICARE, she can enroll in her company's HSA-qualified plan. She can't receive an employer contribution or make pre-tax payroll contributions through the company's Cafeteria Plan. But her spouse can open a Health Savings Account if he's otherwise eligible, and they can make tax-deductible contributions to the family limit.

If her TRICARE plan covers the family, then no one in the family is HSA-eligible. They're probably better off enrolling in another plan if her company offers a choice. If it doesn't, she can still cover the family on the HSA-qualified plan. They won't be eligible to fund a Health Savings Account, but they can participate in the company's general Health FSA if it offers one. Yes, a general Health FSA is disqualifying, but they're already disqualified.

Once Contributions Are Made

Once the money is placed in a Health Savings Account, it doesn't matter whether the employee is or ever was HSA-eligible. Balances continue to grow tax-free, whether that growth is the result of interest paid or gains from investments. And withdrawals for qualified expenses are always tax-free, regardless of the owner's eligibility to make additional contributions.

The Bottom Line

The moral of this story is not to automatically turn away from HSA-coverage when the spouse enrolling in employer-sponsored coverage isn't HSA-eligible. In some cases, the family may be able to take advantage of most of the benefits. It's worth exploring the family situation to determine whether the family can benefit from enrolling.

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