Not Eligible to Fund a Health Savings Account? What about Your Spouse?

Sometimes families can gain the advantages of a Health Savings Account even when the medical-plan subscriber isn't eligible.

The intersection of Medicare and Health Savings Accounts is fraught with danger. Sometimes people who are enrolled in an HSA-qualified medical plan can't open or fund an account. They thought they'd accepted a reasonable trade-off: less first-dollar coverage for non-preventive services in exchange for an opportunity to fund a medical emergency account with pre-tax dollars. They subsequently learn that they're not eligible for the tax benefits.

That's unfortunate - and costly. But the story doesn't always stop there. There may be another way for the family to enjoy the benefits of a Health Savings Account, even of the medical-plan subscriber herself can't open or fund an account.

Determining Eligibility

To fund a Health Savings Account, you must meet three requirements:

1. You must be enrolled in HSA-qualified medical coverage.
2. You can't have access to reimbursement through any disqualifying coverage or program.
3. You can't qualify as someone else's tax dependent.

Disqualifying coverage takes a handful of forms, including

• Enrollment in Medicare.
• Coverage through your own, a spouse's, or a parent's general Health FSA.
• Coverage through TRICARE, the medical plan for active and former military and their dependents.
• Certain care received through the Veterans Administration medical system or Indian Health Services.

Some of these disqualifying situations are temporary, like certain VA and IHS care (disqualifying for three months) and a general Health FSA (disqualifying until the end of the plan year). Other situations result in permanent or near-permanent disqualification (like TRICARE and Medicare coverage). But there are some cases in which the disqualifying situation doesn't affect all family members. In these situations, someone in the family may be eligible to open and fund a Health Savings Account.

Dealing with Medicare

It's not uncommon for working seniors to be covered on their company's medical plan and also enrolled in Medicare. They usually enroll in Medicare for one of three reasons:

1. They're collecting Social Security (or Railroad Retirement) benefits. Under Medicare guidelines, anyone age 65 or older who collects Social Security is automatically enrolled in Medicare Part A (inpatient services), which most Americans receive at no charge.
2. They work for a small company (fewer than 20 employees) and the company's insurer requires them to enroll in Part A and Part B (outpatient coverage) as a condition of remaining on the group plan. Medicare is the primary payer for these small employers, and many insurers require enrollment. Working seniors then have the option to enroll in both the company plan and Medicare only, or disenroll in the company plan and enroll in either Medicare or a spouse's coverage.
3. They're not required to enroll in Medicare, but they do so anyway, perhaps because they fear potential Medicare penalties for delayed enrollment (this belief may or may not be justified), they thought they were required to enroll, or they received some questionable advice.

Regardless of the reason, their enrollment in Medicare disqualifies them from funding a Health Savings Account, even if they meet all other coverage requirements.

The Spousal Solution

The good news: There may be a way for a couple to fund a Health Savings Account, even when the employee who carries the coverage isn't HSA-eligible. The key is to understand that Medicare issues individual policies only. Thus, only the spouse enrolled in Medicare is disqualified.

Imagine this scenario: Al covers his wife Isabella and himself on his small company's HSA-qualified medical plan and is funding a Health Savings Account to his limit every year. He turns age 65 and his company's insurer requires him to enroll in Medicare to remain covered on the group plan. He does so and thus isn't eligible to fund hi account any longer.

Isabella is age 61. She remains covered on Al's group plan and isn't affected by Al's enrollment in Medicare. She can open her own Health Savings Account (she probably has one already to deposit the $1,000 annual catch-up contribution for which she's been eligible since age 55). Anyone can fund her Health Savings Account. Isabella receives the tax benefit of these deposits, whether she, Al, she and Al together (filing a joint personal income tax return) or anyone else funds the contribution. And she can contribute up to $7,300 this year because she's covered on a family plan - even though Al's not HSA-eligible. The contribution level ($3,450 for self-only or $7,300 for family coverage) is based on the contract size, not how many people covered on the plan are HSA-eligible.

What Do You Lose?

What's the downside of funding the non-employee spouse's account? Not much.

First, the spouse can't make pre-tax contributions unless her employer offers an HSA-qualified plan and sponsors a Cafeteria (Section 125) Plan that allows employees to fund a Health Savings Account if they're enrolled on that company's plan. That situation is unusual. Absent this scenario, Isabella can't avoid payroll taxes (which, at 7.65% on a $7,300 contribution, means that she pays more than $550 in payroll taxes). She can deduct all contributions on her federal income taxes, as well as state income taxes (unless she lives in California or New Jersey, the two states that don't allow a tax deductions from state income taxes through a Cafeteria Plan or a personal income tax return). But she can't deduct the payroll taxes.

Second, she can't make tax-free withdrawals from her account to reimburse Al's Medicare Part B premiums (which are at least $170.10 monthly in 2022). She can reimburse his qualified medical, dental, vision, and over-the-counter expenses tax-free, but not his premiums until she turns age 65. This restriction shouldn't be a problem for the couple, since Al has funded a Health Savings Account for a number of years and can reimburse all these expenses - including his Part B premiums - from his account.

The Bottom Line

It's important for Health Savings Account owners to understand federal tax law to ensure that they're eligible to fund their account. It's also important for them to know when another family member can step in and leverage coverage on the family's medical coverage to fund an account. Couples that fail to understand their full range of options may lose $2,000 in tax savings ($7,300 contribution at a combined 27% federal and state income tax rate) annually as a result. That's an expensive price to pay for not understanding the rules.

Disqualifying Coverage