HSA Eligibility When Spouse Has Non-HDHP Family Coverage

A married individual who otherwise qualifies as an eligible individual can contribute to a health savings account (HSA) if his or her spouse has non-high-deductible (non-HDHP) family coverage that does not cover the individual.

Analysis

Sec. 223(a) allows a deduction for contributions to an HSA for an eligible individual. Under Sec. 223(c)(1)(A), an eligible individual is one who, in addition to other requirements, is covered under an HDHP on the first day of the month and is not covered under any health plan which is not a high deductible health plan, and which provides coverage for any benefit which is covered under the high deductible health plan. An eligible individual may have certain permitted insurance, and certain disregarded coverage, in addition to an HDHP.

An HDHP is a health plan that satisfies certain minimum annual de-ductibles and maximum annual out-of-pocket expense requirements under Sec. 223(c)(2)(A). Family coverage is any coverage other than self-only coverage (e.g., an HDHP covering one eligible individual and at least one other individual (whether or not the other individual is an eligible individual)); see Sec. 223(c)(4) and Notice 2004-50, Q&A-12.

Sec. 223(b)(5) provides special rules for married individuals. In general, if either spouse has family coverage, both spouses are treated as having only such coverage. Also, if each spouse has family coverage under different health plans, both spouses are treated as having such coverage under the plan with the lowest deductible. However, if a spouse has HDHP family coverage and the other spouse has non-HDHP self-only coverage, the spouse with the HDHP family coverage is an eligible individual and may contribute to an HSA up to the amount of the annual contribution limit. Because the other spouse is covered by a non-HDHP and, thus, is not an eligible individual, the other spouse may not contribute to an HSA (Notice 2004-50, Q&A-31).

Example 1: H and W are a married couple, both age 35. Throughout 2005, H has self-only coverage under an HDHP, as defined in Sec. 223(c)(2), with a $2,000 annual deductible. H has no other health coverage, is not enrolled in Medicare and may not be claimed as a dependent on another taxpayers return. W has non-HDHP family coverage for W and their two dependents, but H is excluded from Ws coverage.

H is an eligible individual under Sec. 223(c)(1), even though W has non-HDHP family coverage, because H is not covered under that plan. The special rules for married individuals under Sec. 223(b)(5) do not apply, because Ws non-HDHP family coverage does not cover H. Thus, H remains an eligible individual.

The contribution limit for an individual eligible for calendar-year 2005, is the lesser of (1) the HDHP annual deductible (minimum of $1,000 for self-only coverage and $2,000 for family coverage) or (2) $2,650 for self-only coverage and $5,250 for family coverage (Rev. Proc. 2004-71, Section 3.22). Thus, H may contribute up to $2,000 to an HSA (lesser of the HDHP deductible for self-only coverage, or $2,650) for 2005. W is not an eligible individual, because she has non-HDHP coverage.

Example 2: The facts are the same as in Example 1, except that H has HDHP family coverage for H and one of Hs and Ws dependents, with a $5,000 annual de-ductible. W has non-HDHP family coverage for W and their other dependent. H is excluded from Ws coverage.

Because the non-HDHP family coverage does not cover H, the special rules in Sec. 223(b)(5) do not affect Hs eligibility to make HSA contributions. Thus, H may contribute up to $5,000 to an HSA (the lesser of the family HDHP deductible or $5,250).

Example 3: The facts are the same as in Example 1, except that H has HDHP family coverage for H and the two dependents with a $5,000 annual deductible. W is not covered under Hs health plan and has no other health coverage.

H is an eligible individual and may contribute up to $5,000 to an HSA. Because Hs family coverage does not cover W, the Sec. 223(b)(5) special rules do not apply to treat W as having family coverage. W has no health plan coverage and is not eligible to contribute.

Rev. Rul. 2005-25, IRB 2005-18

Reflections: HSAs (Sec. 223) were added by the Medicare Prescription Drug Improvement and Modernization Act of 2003. Rev. Rul. 2005-25 modified the family coverage rule and examples in Notice 2004-50, Q&A-31, which modified the basic HSA rules presented in Notice 2004-2. For a discussion of Notices 2004-2 and 2004-50, and many prior rulings on HSA eligibility and plan qualification, see Walker and Lutz, Employee Benefits & Pensions: Current Developments (Part I), 35 The Tax Adviser 694 (November 2004).