Domestic Partners and HSAs: Understanding How They Mix

Does federal tax law define the status of domestic partners in Health Savings Account rules? Yes. No. And maybe.

When members of Congress drafted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, they wrote a document that reflected traditional families in the Health Savings Account provisions of the law. Unfortunately, that focus didn't include all relationships, particularly domestic partners and same-sex partners.

Since then, neither Congress nor regulatory agencies have added clarity. The Supreme Court rewrote the rules on same-sex marriage nearly a decade ago, but the question of domestic partners and their annual maximum contributions to a Health Savings Account still lacks formal guidance.

Let's explore which areas of Health Savings Account law as applied to domestic partners are clear, which aren't, and what's being said and done in the vacuum.

Federal Tax Law Prevails

Health Savings Accounts are governed by federal law, not state law (with limited exceptions, such as deference to state trust law when determining the account's establishment date). Why is this important? Some states have a common-law statute that recognizes couples as married based on the number of years that they've lived together. But federal law doesn't recognize as a marriage any relationship that doesn't include a certificate of marriage. Including domestic-partner relationships.

Domestic Partners Covered on the Medical Plan

Whether a domestic partner can be covered on a family medical plan depends on the insurer's rules and an employer's choices. Some employer-sponsored plans allow workers to cover domestic partners when the employee can demonstrate a commitment to a partnership (common ownership of real estate or financial accounts, for example). Many plans do not permit this coverage.

If a plan includes coverage for a domestic partner, it by definition covers two or more people and thus is automatically a family plan.

Domestic Partners and Contributions

How much can a domestic partner contribute to her Health Savings Account? Let's review several important points:

1. Being the plan subscriber is not relevant to determining who can open and fund a Health Savings Account. Anyone who meets the eligibility requirements - covered on an HSA-qualified plan, not covered by a disqualifying plan, and not qualifying as another person's tax dependent - can open and fund an account. This list may include covered spouses, ex-spouses, domestic partners, and children who are no longer tax dependents.

2. A domestic partner's coverage automatically makes the plan a family plan. An HSA-eligible individual enrolled in family coverage can contribute up to the statutory maximum annual contribution for a family contract, regardless of how many other people covered on the plan are HSA-eligible.

3. Married couples where both parties are HSA-eligible can contribute to their respective Health Savings Accounts. But their combined maximum is the statutory maximum annual contribution for a family contract. They can split that sum - $8,300 in 2024 - between the two accounts as they choose. Most couples fund one spouse's account through pre-tax payroll contributions because it's convenient and they enjoy the additional tax savins of avoiding federal payroll taxes. But couples retain the flexibility to alter the split as they see fit.

Given that framework, let's consider a domestic partner's situation. She's covered on a family plan, so the statutory family maximum contribution applies. She's not married to someone else on the contract, so she doesn't have to split the contribution so that the sum of her contribution and someone else's don't exceed the family maximum deposit.

Voila! Two domestic partners covered on a family plan can each contribute up to $8,300 in 2024.

Wait, what?

Section 223 of the federal tax code doesn't address domestic partners, so this conclusion can be found nowhere in official government documents. But in 2010, an Internal Revenue Service employee attended an industry meeting and was asked this very question. His answer, which he emphasized was based on his personal knowledge of the law and not IRS policy, was that each person could contribute to the family maximum.

(Note: It's common for industry groups to invite IRS officials to meetings to participate in such discussions. It benefits both the industry and the IRS, which receives feedback on gray areas. Everyone in attendance understands that the IRS official is speaking from personal knowledge and that his or her comments don't reflect official policy or guidance.)

Thus, absent formal guidance, this conclusion isn't etched in tax-code stone. But if you pose this question to most Health Savings Account trustees, they'll respond that each person can (but isn't required to) contribute to the statutory maximum for a family plan, regardless of the other party's contribution level.

By the way, anyone can contribute to a Health Savings Account owner's account. Thus, the medical-plan subscriber (or anyone else) can fund his domestic partner's account in part or in full. The domestic partner - not the person whose money is deposited - would qualify for the tax deduction associated with the contribution. That's the rule - a Health Savings Account owner receives the tax break on all contributions made by anyone other than her employer.

Domestic Partners and Distributions

What about distributions? The law is very clear on this point. A Health Savings Account owner can reimburse tax-free any qualified expenses incurred by himself, his spouse, and his tax dependents. Period. Not domestic partners. Not ex-spouses. Not children who are no longer tax dependents. Even if these people are covered on the medical plan.

Thus, the plan subscriber can't reimburse his domestic partner's (or her tax dependents') qualified expenses tax-free from his Health Savings Account. But the domestic partner can open her own account, fund it (with her own or someone else's money, as we learned above), and reimburse tax-free her own and her tax dependent's qualified expenses.

The Tax-Dependent Twist

We've assumed in this discussion that the domestic partner is not the plan subscriber's tax dependent - for example, due to disability. If she is his tax dependent, the situation changes. She fails to meet one of the three requirements to open and fund a Health Savings Account because she qualifies as another taxpayer's tax dependent under Section 152 of the federal tax code. And since she qualifies as a dependent, the plan subscriber can reimburse her qualified expenses tax-free from his Health Savings Account. Thus, the two partners are limited to $8,300 of contributions that can be deposited into only the account owned by the non-tax-dependent partner. Then, the disabled partner's qualified expenses can be reimbursed tax-free from that account.

The Same-Sex Marriage Parallel

A historical note: Prior to the Supreme Court's affirming same-sex marriage in its 2015 Obergefell decision, same-sex couples weren't recognized under federal tax law as married. Instead, they fell into the same rules as domestic partners today. The change created both a gain (an owner could reimburse tax-free his same-sex spouse's qualified expenses from his account) and a loss (each person could no longer contribute to the family maximum each year).

The Bottom Line

The law is clear on the treatment of distributions for a domestic partner's expenses: Those withdrawals aren't qualified unless the partner is the account owner's tax dependent. But the IRS hasn't issued guidance on domestic partners and contributions. The Service has known about the issue for a decade and a half and understands the direction that Health Savings Account trustees and administrators and many benefits attorneys are giving to their clients and customers. Given this reality, it's doubtful that we'll see official guidance in the future.

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HSA Monday Mythbuster is published fortnightly, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity. HSA Monday Mythbuster is published every other Monday, alternating with HSA Question of the Week.