Deducting HSA Contributions Made by Someone Else

A Health Savings Account (HSA) is a special financial account to which deductible contributions can be made.  The deduction is an adjustment to arrive at adjusted gross income (AGI), meaning that the account owner does not have to itemize deductions to claim the benefit.  HSA distributions used to pay medical expenses, or to reimburse medical expenses paid by the account owner, are not subject to income tax.  HSA payments of non-medical expenses are subject to income tax plus a 20% penalty.  If the account owner is 65 or older, the penalty disappears but non-qualifying payments remain taxable.

An HSA is only permitted when established in connection with high-deductible health insurance plans (HDHP).  An HDHP, which covers you but not your family, is a plan which has an annual deductible of at least $1,250 in 2013 or 2014, and limits total out-of-pocket expenses to $6,250 in 2013 and $6,350 in 2014.  In the case of family coverage, the plan must have an annual deductible of at least $2,500 in 2013 or 2014 and limit total out-of-pocket expenses to $12,500 in 2013 and $12,700 for 2014.

Contributions for a tax year may be made as late as April 15^th of the subsequent year.  Contributions may not exceed the following amounts: 

	2013	2014
Individual Plan	$3,250	$3,300
Family Plan	$6,450	$6,550
Age 55 catch-up	$1,000	$1,000

An interesting planning idea is that contributions to the account owner’s HSA can be made by anyone.  If a contribution is made by the employer, the contribution is excluded from wages.  If the contribution is made by a parent, the contribution is a gift to the child and the contribution is deductible by the child.  See IRS Publication 969, pages 2 & 4.  In the case of where parents might want to financially assist their children by paying modest amounts of out-of-pocket medical expenses, the parent should consider making a contribution to their child’s HSA instead of directly paying the medical expense.  The child can then use the HSA money to pay the expense.  This enables the child to receive an income tax deduction that would otherwise go to waste if the parent paid the medical expense directly to the service provider.  Reducing the child’s AGI could also open up other tax benefits that are limited by the amount of AGI.

 

This planning idea applies to the following fact pattern:  the child has an HSA in connection with a HDHP, the child is not a tax dependent of the parent, the amount of medical expense to be paid is modest and fits within the parent’s gift tax annual exclusion amount (whereas the direct payment of medical expenses is not counted as a gift for gift tax purposes), and the gift to the HSA, when aggregated with all other contributions, does not exceed the HSA maximum for the year.