When your children turn 18, there are a significant number of life changes that take place. They’re graduating high school, going off to college, starting their first jobs, and perhaps living independently for the first time.
As they head off into the first forays of adulthood, make sure they’re prepared for what’s ahead. One piece of that is health care. In this guide, we explore some of the important topics parents and kids should consider when discussing future health coverage.
Examine Their Health Coverage Options
When your kids are young, you can simply add them to your health care plan to get them coverage. But when they turn 18, several other options may pop up. If they’re enrolled in college, the school may offer a student health plan, or they may start a job that offers insurance.
Sit down with your child and explore their health care options together. Compare plans side-by-side and consider factors like:
- Insurance premiums: What will your child have to pay under their own plan? How will your family plan premiums be affected by taking your child off? If they are your only or youngest child, your costs might drop significantly if they join a separate plan.
- Network reach: If your child goes off to college or starts a job in another state, will they be able to find in-network providers in their new city? Paying for out-of-network care can add up quickly and be very expensive.
- Out-of-pocket expenses: For each of the plans you’re considering, examine the rules around how you can use your own health savings account (HSA) or flexible savings account (FSA) to pay for your adult child’s expenses. For example, while your child can stay on your health care plan until age 26, an HSA only allows you to reimburse expenses if they also qualify as a tax dependent. (We speak to this in the next section.)
- Coverage: What upcoming medical needs does your child have? Do you only anticipate routine and preventive care, or do they have ongoing medical costs, or a costly procedure (like wisdom teeth removal) expected on the horizon? Examine each plan to see which option gives your child the most coverage for their future health care needs.
Unsure how to broach this topic with your child? Further has developed a conversation guide for parents and young adults to help you through the health insurance discussion. We also have a short health insurance primer aimed at young adults to help them start to untangle this complicated topic.
Using Your HSA For Your Adult Child’s Health Expenses
If your child is over the age of 18, on your high deductible health plan (HDHP), and is still a taxable dependent, you can continue to use your HSA funds to pay for any eligible medical costs they may incur, like back-to-school physicals, immunizations, prescriptions, sports physicals and flu shots.
It’s important to note that while adult children qualify to stay on their parents’ health plan until age 26, the IRS requirements around claiming them on your tax return are more complicated.
For your child to be a tax dependent, they must meet several qualifications, including:
- Be under the age of 19, or under the age of 24 if a full-time student
- Be your biological child, stepchild, adopted child, or foster child
- Have lived with you for at least six months
- Do not earn an income of more than half the cost of their support expenses
This means that once your child turns 24, they may still be on your health plan, but you will no longer be able to use your HSA for their medical expenses.
However, if they remain on your HDHP, your child is eligible for their own HSA.
Opening Their Own HSA
If your child opens their own HSA, it can be a great way for them to put aside money for current medical expenses as well as save for future unexpected costs. Establishing an HSA when they just became (or are about to become) financially independent is a good way to teach financial awareness and set up safety net funds.
Even if a parent has an employer-sponsored HSA, a health care dependent’s account will qualify as an individual plan. So rather than funding it through payroll deductions, your child will connect their personal bank account to withdraw funds. It’s important to know that your child will be responsible for any administrative fees associated with the account, which will be automatically deducted from the account balance each month.
As long as the child is a health care dependent, parents can also contribute to their child’s new HSA by transferring money from their bank account. Both the parent’s and child’s individual HSAs will qualify as part of a family plan, and each account can meet the family contribution limit: $7,200 in 2021. When it comes to annual taxes, the account holder receives any tax deductions on their return, whether HSA contributions were made by the child or the parent.
When your child turns 26 or joins their own health care plan, they will take their HSA and its funds with them. If their new plan is an HDHP, they’ll be able to keep contributing to their HSA. If not, they still will be able to use the account balance to reimburse eligible medical expenses.
Once a child separates from their family health plan, parents will no longer be able to contribute to their child’s HSA. However, you will have set them on the path for financial success and a better understanding of their health care needs and expenses.