From the Hotline: HSA Reimbursement for Stepchild Expenses
Question: We have an employee who wants to have her stepdaughter’s orthodontia bills reimbursed by the HSA. This child is not claimed on her taxes, but she does provide support and shares custody of this stepdaughter.
Answer: HSA distributions are tax-free if they are used to pay or reimburse qualified health care expenses for the taxpayer, spouse, and/or dependents who are claimed on the taxpayer’s federal tax return. However, in accordance with IRS guidance for HSAs, a child of parents who are divorced, separated, or living apart for the last six months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases his or her claim to the child’s exemption. (Reference: IRS Publication 969). HSA distributions that are used for nonqualified expenses, such as paying bills for non-tax dependents, are subject to taxes and potential penalties. Employees should review the circumstances of their particular cases with their personal tax advisors.