HSA Contributions for Adult Children on Your Health Plan

Why are Health Savings Accounts (HSAs) popular savings vehicles? Contributions are made with pre-tax dollars, the funds grow tax-deferred, and withdrawals are tax-free if used for qualified healthcare expenses. That's a triple-tax advantage!

But did you know that your adult child on your healthcare plan might be able to contribute to their own HSA? Here are the rules.

Adult Children Who are Dependents

The Affordable Care Act (ACA) requires that major medical plans cover dependents to age 26; however, these dependents do not need to be tax dependents.

To use your HSA funds for your dependent child's health expenses, the adult child must be claimed as a tax dependent on the HSA's owner tax return.

Who Qualifies as a Tax Dependent

The IRS states that five tests must be met for a parent to claim a child as a dependent:

• Relationship: The child must be the taxpayer's biological, adopted, or foster child.
  
  
• Age: The child must be younger than 19 or 24 if they are full-time students.
  
  
• Residency: The child must live with the parents for more than half the year (does not apply to children away at college).
  
  
• Support: The child may not have provided more than half of their yearly support.
  
  
• Filing Status: The child may not file a joint return.

It's important to note that all five tests must be met to qualify as a child dependent. However, if they are not a child dependent, they could be a “qualifying relative dependent” if their gross income is less than $5,040 (in 2024) and the parents provide more than half of the child's total support during the year.

So, Who Can Open Their Own HSA?

Freddie is 24 years old, employed, and files his own tax return. Therefore, he is not eligible to be claimed as a tax dependent by his parents. However, he can be covered on his parent's high deductible health plan (HDHP) until age 26, but their HSA funds cannot be used to pay his out-of-pocket medical expenses. As a result, Freddie opened his own HSA so contributions could be made to cover his medical expenses.

How much can be contributed to the account? Freddie is covered on a family-qualified HDHP, so he can contribute up to the maximum family contribution of $8,300 (2024). So, the parent can have an HSA and contribute the maximum family contribution of $8,300, and the dependent adult child can contribute up to $8,300 in their own HSA.

Norman is 18 years old and lives with his parents. He works full-time and pays all his expenses, including rent, to his parents, but he is covered by his parent's family HDHP. When reviewing the IRS rules, Norman is neither a qualifying child nor a qualifying relative because he provides more than half his support by paying for his rent and food. As a result, he can open his own HSA.

Lucy is 20 years old and lives with her parents, who provide most of her support. She works part-time and earns an annual salary of $18,500. Lucy is not a qualifying child because she is not younger than age 19, and while she is younger than 24, she is not a full-time student. She is also not a qualifying relative because she earns more than $5,040. She can open her own HSA.

Gifting/Deduction

Let's assume Freddie can only afford to contribute $2,000 of his earnings to an HSA. To reach the 2024 maximum contribution of $8,300, his parents can contribute an additional $6,300. It's important to note that Freddie's parents cannot use pre-tax payroll contributions, nor will they receive a medical deduction expense, and the contribution does count toward the annual gifting limit. However, any contributions made to Freddie's HSA, either by Freddie or his parents, will qualify as an above-the-line deduction on Freddie’s tax return.

Summary

Many understand the tax advantages of employing a health savings account for themselves or their family, but few know how it can be used for an adult child. Check the rules to see if your adult child can open their own HSA.

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