The passage of the Affordable Care Act in 2014 introduced many changes to the healthcare landscape in the United States. One of these changes was the ability for children to remain on their parents’ health insurance plan until they reach age 26. In addition to having access to health insurance at a lower cost than they might have on their own, this measure also creates a potentially lucrative planning opportunity for young adults who can be covered by a parent’s High-Deductible Health Plan (HDHP), giving them the opportunity to contribute to their own Health Savings Account (HSA) up to the full family maximum contribution limit ($7,300 in 2022).
Health Savings Accounts (HSAs) are one of the most popular savings vehicles because of their triple-tax advantage: account owners can take an above-the-line tax deduction for eligible contributions, growth in the account is tax-deferred, and withdrawals are tax-free if they are used for qualified healthcare expenses. Notably, funds in an HSA that are withdrawn for any reason other than for qualified medical expenses before age 65 are subject to a 20% early withdrawal penalty. After age 65, though, there is no penalty, and funds can be used for any reason (but are treated as taxable ordinary income if not used for qualified medical expenses).
In return for these significant benefits, the IRS imposes certain requirements for who can contribute to an HSA: The individual must be covered by a High Deductible Health Plan (HDHP) (and have no other health coverage or be enrolled in Medicare) and they may not be claimed as a dependent on someone else’s tax return. Notably, the account owner does not have to be covered under their own healthcare plan, so a young adult who is covered under their parents’ HDHP plan (and who cannot be considered a dependent on their parents’ tax return) would potentially be eligible to contribute to their own HSA. Further, while spouses can only make combined contributions up to the family maximum contribution limit ($7,300 in 2022), non-spouses covered under the same health plan can make contributions to their own HSA up to the family limit as well!
Because HSA owners must be covered under an HDHP in order to contribute, it is important to first consider whether choosing an HDHP is the best choice given a family’s medical expenses and financial situation. This presents an opportunity for advisors to assess whether the tax benefits of HSAs outweigh the costs of opting for HDHP coverage (which typically has lower premiums but higher deductibles relative to traditional health insurance plans).
Ultimately, the key point is that because children are now allowed to remain on their parents’ health insurance plan until age 26, non-dependent children covered under a family HDHP may be eligible to contribute to their own HSAs. And as HSAs offer significant tax advantages, advisors can help clients ensure that opting for family HDHP makes sense financially for the family as a whole!
Welcome back to the 306th episode of the Financial Advisor Success Podcast!
