Whether you’re married or have a domestic partner, Laura clarifies the IRS rules for opening, contributing, and spending your HSA.
Whether you’re married or have a domestic partner, Laura clarifies the IRS rules for opening, contributing, and spending your HSA.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast
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An anonymous caller says, “I chose a high-deductible health plan with my employer so I can contribute to an HSA. However, I’m also covered under my wife’s low-deductible health plan with her employer. If I add my wife to my health plan, can I contribute up to the annual HSA limit for family coverage?”
Thanks to the anonymous caller for this question! Whether you’re married or have a domestic partner, the IRS rules for opening, contributing to, and spending your HSA can get tricky. I’ll explain how to use your HSA as a couple to maximize its benefits.
Hi, everyone, and thanks for joining me this week! I'm Laura Adams, a personal finance expert hosting the Money Girl Podcast since 2008, with over 42 million downloads.
I’m the founder of The Money Stack, a weekly newsletter helping you build your bank account and live rich on your terms. I also work with select brands doing on-camera and writing work as a financial spokesperson and female money speaker.
As always, you can reach me using my contact page at LauraDAdams.com. That's also where you can learn more about my newsletter, books, and money courses. Got a money question or idea for a show topic? Call 302-364-0308 and leave me a message.
What is an HSA?
HSAs were created in 2003 to help Americans manage and reduce the rising costs of healthcare. They’re one of the most powerful tax-advantaged accounts because they allow you to cut medical costs, eliminate taxes, and invest your balance for growth.
Many financial experts call it a "triple tax threat" because HSAs provide three significant tax advantages:
1. Your HSA contributions are tax deductible.
2. Your HSA earnings grow tax-deferred.
3. Your HSA withdrawals are never taxed.
When you take money from an HSA to pay qualified healthcare expenses–including medical, dental, hearing, and vision care costs–your contributions and account earnings are entirely tax-free. What’s not to love about that?
RELATED: HSA hacks–how to optimize your health savings account
Who qualifies for an HSA?
According to the IRS, to qualify for an HSA contribution, you must meet the following four requirements:
Because the anonymous caller said his wife's health insurance covers him, that makes him ineligible for an HSA. He could be removed from his wife's insurance, maintain his HSA-eligible policy, and make HSA contributions. Or he could stay on both health plans and forgo making HSA contributions.
You can have two health policies but must use the primary plan first. If it's unable to cover your entire claim, your secondary policy may cover all or a portion of the remaining costs. However, you're still responsible for deductibles and cost-sharing, such as copays or coinsurance. In other words, having two health policies doesn't mean you're covered or reimbursed twice.
The best decision for the caller depends on how important having a secondary health plan is to him. It could be worthwhile if he used it in the past or expects to use it in the future. However, being removed from his wife's policy could save money by reducing her premium and allowing him to pay eligible out-of-pocket healthcare expenses tax-free with an HSA.
READ ALSO: HSAs in 2024–understanding changes and maximizing benefits
How to manage an HSA as a married couple
When you’re married, the IRS considers you a single unit for HSA purposes. So, if one or both of you qualify for a HSA, the most you can contribute is the allowable family limit. Having a family health plan means it covers you and someone else, like a spouse or dependent child.
For 2023, if you have a family health plan, the HSA contribution limit is $7,750. That limit will increase to $8,300 in 2024.
Returning to our anonymous caller, let’s say he becomes eligible for an HSA after being removed from his wife’s health plan. If he adds her to his HSA-eligible plan, he will have family coverage and be allowed to contribute up to the annual family limit.
The caller’s wife is allowed to enroll in more than one health plan. However, the caller would pay a higher insurance premium for adding her to the policy.
If you’re married and both of you have self-only coverage, each spouse can contribute up to the annual individual limit, which is $3,850 for 2023. That limit will increase to $4,150 in 2024. If you’re over 55, you can contribute an additional $1,000 to your HSA with an individual or family plan. So, if the caller becomes eligible for an HSA but doesn’t add his wife to the health plan, he could contribute $3,850 for 2023 if he’s under 55.
If one spouse has individual coverage and the other has family coverage because it includes a dependent, you’re still limited to the family limit as a couple. You can put all of it in one spouse’s HSA or split it up in any proportion you like to both your HSAs.
When both spouses are covered by the same HSA-eligible health plan, you can have an HSA in one spouse’s name or opt for separate HSAs, as long as you don’t exceed the annual family contribution limit. But you can never have a joint HSA.
How to manage an HSA as domestic partners
Now, let's discuss using an HSA when you're in a domestic partnership. Since partners aren't married, they're two separate entities for HSA purposes.
That means if you both have HSA-eligible health plans (or the same plan), aren't a tax dependent of the other partner, and have someone else (like a child) on your health plan, you can both contribute up to the family maximum. But when each person in a domestic partnership only insures themselves, you can only contribute up to the individual HSA limit.
However, you cannot pay your partner's eligible medical expenses with your HSA since you're unmarried. You could only pay costs for yourself and any dependents.
If one partner is a tax dependent of the other, only the partner with the HSA-eligible health plan could have an HSA and fund it up to the annual family contribution limit. The HSA account holder could use it to pay for the dependent's eligible expenses. Remember that being a dependent makes you ineligible for your own HSA.
Tips for spending funds in an HSA
I mentioned that you can’t have a joint HSA. Each spouse or partner who wants to contribute to one must qualify on their own and open a separate account. You can’t transfer funds between HSAs; however, you can withdraw funds to pay or reimburse eligible healthcare expenses for yourself, a spouse, and dependents.
Some employers offer HSA matching, which gets included in the annual individual and family limits. But note that whether you get HSA-qualified insurance on your own or through an employer, you can take it with you if you leave a job, change your health plans, or retire.
A great HSA feature is that there's no spending deadline. If you don't have any medical expenses or don't want to use HSA funds to pay for them, your balance rolls over from year to year, even if you no longer have an HSA-eligible plan. You can always spend it on qualified, out-of-pocket healthcare costs for you, dependings, and a spouse, no matter if you file taxes jointly or separately.
Note that withdrawing HSA funds for non-qualified expenses, like groceries or a vacation, means paying income taxes plus a steep 20% penalty. So, it’s never wise to put money in an HSA you might need for living expenses.
If you still have HSA funds after age 65, it becomes similar to a retirement account. You can use it for non-medical expenses without penalty; however, you must pay income tax on non-qualified withdrawals. That's a great reason to max out an HSA yearly, even if you don't expect many medical expenses.
How do you open an HSA?
If you qualify for an HSA, they're available at many online and local banks, credit unions, brokerages, and specialty institutions. A couple of my favorites are Lively and HSA Bank.
If you become uninsured or switch to a non-qualified health plan, you can still spend your HSA on qualified expenses tax-free. However, you can't make new HSA contributions if you’re not covered by a qualified health plan.
READ ALSO: Your guide to savings money with an HSA now and in retirement
You can learn more about HSAs in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
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