My son is 21 years old and starting his first job. He is covered under my health insurance, which is a non-HDHP PPO, until he turns 26. (Because I have other children, I wouldn't save any money by no longer including him in my family plan.)
His new employer offers a HDHP with no monthly cost to the employee, and they contribute $100/month to a HSA for each employee. The plan has a $1500 deductible.
It's a no brainer to take the insurance, since it's free to him, and may cover some things better than mine does. We've spoken to the coordination of coverage person at my health insurance company, and it looks like the combination of the two plans will be very favorable for him.
But my understanding was that because he has "other insurance" (mine) which is not a HDHP, he is not eligible to have a HSA. He asked if the employer could put the money into a FSA for him instead, but they said that they could not. We did some calculations, and we believe that having my coverage as secondary coverage will save him more than $100/month right now, so he decided to take the HDHP (which will be his new primary insurance), keep my PPO also as secondary, and forego the HSA contribution.
Today they told him that the person who handles their benefits thinks he is still eligible for a HSA. He has been clear with them that he is covered by another health insurance plan which is not a HDHP. If they set up an HSA for him and they're wrong about his eligibility, what will the consequences be, to them and to my son?
It looks like he will have to pay additional taxes on the money, however, since it's free money, that's not a big problem. Since he's not eligible for a HSA, his eligible contribution maximum is $0. If his employer contributes $1200 for him (but he contributes no additional funds of his own) he'll have excess contributions of $1200.
It looks like on Form 8889 he'll declare the $1200, add it to his taxable income, and pay 10% additional tax on it. It seems like he may also have to file form 5329 and pay 6% excise tax on it.
The part I don't understand is that he has an option to withdraw the excess contributions and avoid some of those penalties. In that case, does he not need to spend the money on qualified medical expenses? Can his employer just put $100 each month in the account for him and he just immediately withdraw it? In that case I assume he still needs to file form 8889 and count it as income, but does he avoid both the 10% and 6% tax penalties by doing that?
To me it makes sense that if he accidentally put his own money in when he wasn't supposed to, he could just take it out and pay the tax on it and be fine. It's when it's his employer putting the money in for him that it seems more confusing to me. Can he just take the money out and it doesn't count as a "distribution" that needs to be used for qualified healthcare expenses? Is there any benefit to actually spending the money of qualified healthcare expenses?
Is it OK for him to use the HSA for which he is ineligible as a pass-through of taxable income from his employer, which he will immediately withdraw as an excess contribution correction?
Update: His employer has just realized that he is in fact not eligible for an HSA. Or at least in their understanding he can have an HSA but neither he nor they can contribute to it. Obviously he'd like to get the free money if he can, even if he has to pay taxes on it. Is there any penalty to his employer if they contribute to an HSA on his behalf, knowing that he is not eligible, and that the money will be an excess contribution?