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HSAs – Consider the Gift of Health Savings for Adult Children

HSAs – Consider the Gift of Health Savings for Adult Children

| July 14, 2022

If you have adult children under age 27 who are no longer eligible to be claimed as dependents on your taxes but are still covered by your high deductible health plan, this may be something they can take advantage of.

An HSA Overview – Triple Tax Benefits

Our in-depth planning work with clients encompasses a broad range of wealth management areas. This includes seeking to maximize employer benefits and tax-advantaged strategies of all kinds for you and your family. One such example is health savings accounts (HSAs), which pack a triple tax benefit:

  1. If your HSA is through your employer, contributions can be deducted from your pay pre-tax, reducing the amount of income being taxed. (Any employer contributions are not included in income.) If you have opened an HSA yourself, contributions are tax-deductible and do not require you to itemize your return.
  2. Investment returns within the HSA account are tax-free, allowing you to take advantage of compounding growth.
  3. Qualified withdrawals (used for qualified medical expenses) are tax-free.

All the more reason to consider optimizing these benefits for qualifying children who may not yet be covered under their own high-deductible health plan (HDHP) or opt to continue under a parent’s family HDHP for its health coverage and higher family HSA contribution limits. 

Who Qualifies

HSAs are a way to potentially reduce the financial outlay of individuals who have health care plans with high deductibles. To qualify, you must have a HDHP that includes:

  • A deductible of at least $1,400 and an out-of-pocket maximum of $7,050 or less for a
    single person.
  • A deductible of at least $2,800 and an out-of-pocket maximum of $14,100 or less for a family.

You must be at least 18 years old to qualify for an HSA, and you cannot be claimed as a dependent on someone else’s tax return. You or your spouse cannot participate in an FSA or HRA, unless they are special purpose/specifically compatible with an HSA.

Contribution limits. For 2022, contributions are limited to $3,650 a year for individuals and $7,300 a year for families. (Note: Those age 55 and older can contribute an additional $1,000 catch-up a year. However, if you are enrolled in Medicare, you can use an existing HSA to pay for medical expenses but can no longer contribute to your own HSA. Your spouse though, if not on Medicare but covered by a family HDHP, can contribute the full family limit into their HSA, plus their own catch-up.)

Example - Adult, Non-Tax Dependent Children

While a child is still tax-dependent – up to age 19, or age 24 if a full-time student – the parent can use their own HSA to pay the child’s out-of-pocket medical expenses. After that point, the parent’s HSA cannot be so used, even though health plans that cover dependent children must also offer coverage for adult children through age 26.

Once a child is no longer eligible as tax dependent but still covered by a parent’s HDHP, then the adult child establishes their own HSA. Let’s say one parent, Sarah, has a HDHP with family coverage for Sarah, her husband Bill, and their daughter Ann. Sarah has an HSA and contributes the full family contribution of $7,300. Ann, who is 25, opens her own HSA. Sarah and Bill can contribute their after-tax dollars to Ann’s HSA up to the full family contribution amount of $7,300.

Now let’s say they also have a son, Sam, who is 19 years old, moved out on his own, and is no longer eligible as a tax dependent. Through age 26, Sam will also be covered under Sarah’s family HDHP. Sam can open his own HSA and Sarah and Bill, with their after-tax dollars, can make the maximum family contribution each year into Sam’s account. At the 2022 family contribution amount, this would amass a principal amount of over $50,000 – tax-free with compounding returns.

Anyone, not just parents (so grandparents, aunts, uncles, or even non-family members), can contribute to the HSA up to the maximum limit based on the type of plan (single or family). Contributions are reported on the HSA account holder’s tax return (Sarah’s and Sam’s in this example) who receive the tax benefits of the contributions regardless of who made them.

A Meaningful Retirement Tool

HSAs can become an extremely beneficial, compounding retirement asset. Because all the funds in an HSA account follow the account holder (even when changing employers), one can gain an advantage by maximizing HSA savings early and across all years to cover medical expenses in retirement.

Please reach out to visit about the many tax-advantaged opportunities our wealth management planning provides. Our goal at ISC Financial Advisors is to integrate and educate around all areas of investing and wealth management to empower you and your decision-making toward achieving your financial goals. 


This article is intended to provide an overview and is illustrative only. Consulting with a financial professional is advised.