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I cover my husband and stepchild on my HDHP insurance with an HSA account. Recently, we discovered that the child's mother purchased insurance to cover herself and her children, including my stepchild. This insurance is not an HDHP. She has had the insurance for almost six months but we were only informed a few days ago. To our knowledge she has not submitted any claims for the child through this insurance, but husband and I have submitted claims for the child to my HDHP insurance and paid for them from the HSA (before we knew the child was covered by additional insurance).

  • What are the tax/legal implications for my husband and I now that we are aware my stepchild is covered by a non-HDHP health plan as well as my HDHP plan?
  • Can the child remain on my HDHP insurance until open enrollment? Can we insure them next year on my HDHP?
  • Can we still use my HSA to pay for the child's medical expenses?
  • Could we face tax penalties or other repercussions?
  • What are the next steps we should take with our insurance
    company/accountant/bank?

When I initially read the IRS guidelines for HSAs (https://www.irs.gov/publications/p969), my understanding was that if you are covered by an HDHP with an HSA, you cannot be covered by any other type of insurance. The answer to this question (Can I use HSA money to pay for family member that isn't covered by an HDHP?) makes it sound like these restrictions might only apply to the HSA account holder (me), so it would be permissible for my stepchild to be covered by other insurance because they are not the policy holder. Can someone clarify?

I have reviewed the following questions but they do not address our situation:

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When we discuss HSA eligibility, we need to look at two factors. We need to look at whether or not you are eligible to contribute to your HSA, and we need to look at what expenses are eligible to be paid by the HSA.

Because you personally are covered by only an HSA-eligible HDHP and no other health coverage, you are eligible to contribute to your HSA. The only question here is whether you are allowed to contribute to your HSA at the self-only limit, or if you qualify for the family limit. Because your HDHP covers you and at least one other person, you are able to contribute at the family limit. (For HSA purposes, 2 people covered count as a family.)

The fact that you have another dependent that is covered by additional health insurance doesn't matter, because you already qualify for the full family HSA contribution limit with you and your husband's coverage.

From IRS Publication 969 (emphasis mine):

Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual).

Spending the money in your HSA is not really related to the eligibility for contributing. Once the money is in your HSA, it is yours to spend, even if you become ineligible to contribute at some point in the future. Qualified medical expenses that can be paid from your HSA can be for you, your spouse, or any of your dependents.

The rule according to IRS Publication 969 is this (emphasis mine):

Qualified medical expenses are those incurred by the following persons.

  1. You and your spouse.

  2. All dependents you claim on your tax return.

  3. Any person you could have claimed as a dependent on your return except that:

a. The person filed a joint return, b. The person had gross income of $4,050 or more, or c. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2017 return.

For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption.

If that part in bold applies to your situation, then you can pay for your stepchild's medical expenses even if the child's mother is claiming him as a dependent on her tax return.

To explicitly answer your questions:

  • No tax/legal implications with this new information. You and your husband's HDHP coverage make you eligible to contribute to your HSA at the family contribution limit, and your stepchild's coverage does not make you ineligible.

  • The child can be covered by your health plan; it does not make you ineligible to contribute to your HSA.

  • Yes, you should be able to use your HSA funds to pay for your stepchild's qualified medical expenses.

For more information on contributing to and spending from your HSA, see IRS Publication 969.

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  • This is a good answer, but I think there's probably a little more subtlety to the situation. My health care insurance always wants to know if I am covered by additional insurance so they can fight it out with that insurance provider about who covers what. In this situation, the payments from the HSA are probably OK, but may have been wasted if the other insurer would handle the costs first. Also, in that situation, any "credit" towards the HDHP plan deductible would probably have been incorrectly taken.
    – Eric
    Commented Sep 5, 2018 at 11:57
  • This is great info and clears up my confusion. I initially thought the rules for contributing to an HSA were the same as rules for being covered by an HDHP. Now I see they are separate. The insurance company also confirmed this when I called to notify them about the additional insurance.
    – lizziv
    Commented Sep 5, 2018 at 21:24

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