As you investigate ways to save money on health care for your family, you’re likely to run across information on setting up health savings accounts. These tax-free savings plans work much like traditional savings accounts, but the funds can only be used for qualifying health care expenses. HSAs pair nicely with high-deductible health insurance plans, and in most cases, you must have purchased such a plan in order to be eligible to open an account.
But if you have college-age children, it can be challenging to determine if a health savings account is the right move — or if it is even legally possible — for your family. Should you pursue a HSA if your children are legal adults, even if they’re still in school and your financial responsibility?
Setting Up a Health Savings Account for Your Family
Since the Affordable Care Act passed in 2010, adult children up to age 26 can be listed as dependents on their parents’ health insurance plans. But health savings accounts are a different story. In order to qualify for their expenses to be reimbursed by a family HSA, any adult children you have must be tax dependents.
What exactly is a tax dependent? That’s anyone in your family other than you and your spouse who you provide care for, typically children. To meet the IRS definition of a tax dependent, qualifying children must:
- Not be claimed as dependents on any other tax returns, like those of another parent. They also cannot claim anyone as a dependent.
- Have some family connection, usually as a son/daughter, stepchild, adopted child or foster child. Grandkids, siblings or half-siblings, or step-siblings may also qualify if they live with you.
- Be unmarried, or married but not filing a joint return. There’s an exception for married couples filing a joint return without claiming personal exemptions.
- Be considered U.S. residents, or in some cases may be residents of Canada or Mexico.
- Be under age 19, or a full-time student under age 24.
- Live with you at least half-time, unless he or she has a temporary absence for education, military service or vacation.
- Not provide more than half of their own support.
You should be able to open a health savings account for your child if he or she is under age 24 and in college full-time, and you’re paying at least half of his or her expenses. If your child is older than 24, a health savings account is unlikely to be a possibility for your family.
If your child does meet the definition of a tax dependent, but is a member of your qualifying high-deductible health insurance family plan, you can make a full family HSA contribution. Additionally, the non-dependent child may be eligible to open an individual HSA and still meet the full family contribution limit.
Setting Up a Health Savings Account for Your Child
What if your child does not qualify to be on your family insurance plan or have medical expenses covered by your health savings account? If your child is filing his or her own tax return, there is another option for helping them with health care expenses. You can set up a high-deductible plan for your college-age dependent and establish a HSA in their name. Then, you can make contributions to that account.
This does get a bit tricky, as there are limits to the amount that can be deposited in a health savings account tax-free. You and your spouse have an annual limit (currently $6,750) that you can put in your own HSAs. However, you can still put that same amount in each child’s HSA. You will need to ensure that your child files Form 8889 with the IRS each year, which can also be the basis of a tax deduction. Consult your financial adviser to learn about the tax advantages you qualify for, or if you have questions about setting up an HSA for your college-age child.
Most major financial institutions offer health savings accounts. Look for one that does not have high administrative fees or that waives the fees once you’ve hit a minimum balance. Being able to use a debit card tied to the account for expenses and to manage your account online are big pluses.
Reasons to Set Up Health Savings Accounts for Your Child
The money in health savings accounts rolls over each year, so your child will not have a time limit in which they must use the funds. That means that they could have a nice medical nest egg set aside for use throughout their 20s.
Without that medical financial cushion, your child could be in serious financial trouble just due to a minor medical issue. The cost of having a broken bone, for example, can run into the thousands of dollars. By having a health savings account to fall back on in circumstances like this, your child won’t have to go deeply into debt for an accident or illness.
Having money set aside for medical issues can also be an encouragement for your child to get necessary preventative care that could lessen the impact of serious medical issues. Instead of waiting until a small concern becomes much more serious, your child can seek medical attention right away. Lack of money isn’t part of the equation in making medical decisions.
Let’s say that your child never needs to use the funds in his or her HSA. What happens to that money? As the law stands now, that tax-free money could be used for retirement once the account holder reaches age 65. This seems a long way into the future for a college student, but the understanding that the money can be deposited tax-free, can earn interest tax-free and will stay in place until it’s needed or until your child retires can make these accounts incredibly attractive.
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