How Much Can Non-spouses Deposit into HSAs? The Pleasant Answer Is . . .

You may be surprised to learn how much some adults covered on your medical plan can contribute - probably - to their own Health Savings Accounts.

How much can you and various family members contribute to your Health Savings Accounts when you're all covered on an HSA-qualified family plan?

The answer may be more than you think. Or not. You decide - after reading the analysis below.

Highlights

In last week's column, we learned that Health Savings Account rules change for parents and their children who remain covered on the family medical plan but no longer qualify as a tax dependent:

1. A parent can't reimburse tax-free any expense that a child incurs once the child no longer qualifies as the parent's tax dependent.
2. These children covered on the family plan who are no longer a parent's tax dependent can open their own Health Savings Account, assuming they meet all other eligibility requirements. Eligibility isn't limited to medical-plan subscribers only.
3. These children can fund their own Health Savings Accounts (including with contributions from a parent, other relative, or anyone else) and deduct the contribution on their personal income tax returns.
4. These children can reimburse their own (and their tax dependents', if they have any) qualified expenses tax-free from the account.

The cliffhanger is last week's column was how much a child in this situation can contribute to his or her own Health Savings Account.

Contribution Limits

There is no single iron-clad answer to this question. When I ask this question to audiences in my continuing-education classes, I usually hear these two answers:

• "Up to the limit for self-only coverage ($3,650 in 2022 and $3,850 in 2023), assuming that the child is single."
• "The difference between the statutory maximum annual contribution for a family plan ($7,300 in 2022 and $7,750 in 2023), less what the parent deposits in his or her Health Savings Account."

Which answer do you think is correct?

The Correct Answer (Probably)

Either of these approaches will leave the child with lower contributions than the amount to which or he or she is entitled. The correct answer is probably that the child can contribute up to the statutory maximum contribution for a family contract, regardless of the funding level of anyone else in the family enrolled in the medical coverage.

Huh?

This belief is derived from two Health Savings Account rules:

1. The applicable statutory maximum annual contribution is based on the size of the contract (self-only or family), regardless of how many family members are HSA-eligible. In this case, the coverage is a family contract, so the $7,300 figure applies in 2022.
2. Spouses are limited to the $7,300 ceiling, which, if both are eligible and funding their own Health Savings Accounts, they can split however they choose.

An adult child covered on the plan definitely has family coverage, which means that the $7,300 family maximum contribution is applicable. The adult child isn't married to another person covered on his or her parent's plan, so t here's no requirement to split the $7,300 contribution ceiling with another person.

Ergo, the adult child can contribute $7,300 to his or her Health Savings Account.

But What Does the IRS Say?

Section 223 of the tax code is silent on this question - and many other aspects of Health Saving Accounts. The Internal Revenue Service, Department of the Treasury, Department of Labor, and Department of Health and Human Services issue notices, revenue rulings, and field assistance bulletins that address common Health Savings Account issues. But there are areas in which the agencies have not provided direction, interpretation, or a safe harbor. This is one such topic.

But all is not lost. In 2010, a meeting of a committee of the American Bar Association invited an IRS employee to a Q&A session. I attend similar meetings several times annually. The IRS representative is there is a personal capacity - not representing the agency in any way - and expresses personal feedback to specific questions. These sessions benefit both the agency and the audience, as the agency understands the emerging concerns of administrators and employers and the audience of benefits professionals gains insight into what the IRS is thinking.

The 2010 ABA meeting followed the standard format. The audience poses a question and proposes an answer. The agency representative either agrees with or disputes the answer. In this case, the subject was domestic partners, not adult children, but the concept is the same: Can an HSA-eligible individual enrolled in family coverage and not married to someone else on the contract fund his or her account to the statutory maximum for a family contract? The questioner posited that the person, could in fact, contribute to the max, irrespective of how much anyone else covered on the contract deposited into his or her Health Savings Account.

The IRS agent, according to the transcript, agreed with this conclusion based on his or her personal knowledge of the governing rules.

Is There a Risk in Adopting This Approach?

That's a good question. Yes, there's always some degree of risk when a taxpayer does something not explicitly outlined in the law or regulations. And yes, Congress probably didn't intend to create such a loophole for domestic partners, ex-spouses, and adult children covered on a family medical plan. But there is no record of a debate on this issue in the Federal Register as Congress discussed the Medicare Prescription Drug Improvement and Modernization Act of 2003, so it can't be argued that this approach goes against the intent of Congress.

The law is full of such gray areas. You must decide whether legislative and regulatory silence is enough to move forward. I can tell you that two of my adult children opened Health Savings Accounts when they were covered on our family plan. Each contributed independent of my funding our family account to the statutory maximum.

The Bottom Line

If your family is in this situation, you must decide how you want to handle contributions to your Health Savings Accounts. You'll never go wrong when the sum of contributions to all Health Savings Accounts owned by family members covered on the contract are no greater than the statutory maximum annual contribution for a family contract.

But you could be selling family members' short on the opportunity to reduce taxable income, create an emergency medical savings account, and create tax-advantaged retirement savings by limiting total family contributions to a figure below what even an IRS representative, based on his or her personal understanding of the law, believes is the potential financial bonanza.

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