Question: What are the requirements for an individual to be HSA-eligible?

Short Answer: To be HSA-eligible, individuals must a) be enrolled in a HDHP, b) have no disqualifying coverage, c) not be enrolled Medicare, and d) not be able to be claimed as a dependent on someone else’s current year tax return.

Note: This is the second in a two-part series addressing HSA eligibility.

• Part I: The HSA Eligibility Requirements

General Rule: What Does it Mean to be HSA-Eligible?
Health Savings Account (HSA) eligibility has one central focus: The ability to make or receive HSA contributions. In other words, only individuals who are HSA-eligible can open and make contributions to an HSA (e.g., through the employer’s payroll or as a direct deposit) or receive contributions to an HSA (e.g., the employer contribution made available to employees enrolled in the HDHP).

• For more details: Newfront Go All the Way With HSA Guide

Individuals who are not HSA-eligible cannot make or receive HSA contributions. Where an individual or employee mistakenly makes or receives HSA contributions, those amounts will need to be reversed with a corrective distribution to avoid a potential 6% excise tax on the excess (i.e., ineligible) contributions. The employer may also be able to work with the HSA custodian directly to reverse any mistaken HSA contributions.

For more details:

• Correcting Excess HSA Contributions

• Correcting Mistaken HSA Contributions

The HSA Eligibility Requirements

Individuals must satisfy the following four requirements to be HSA-eligible (bolded items covered in this post):

1. Be covered by a qualified high deductible health plan (HDHP);

2. Have no other disqualifying health coverage;

3. Not be enrolled in any part of Medicare; and

4. Not be able to be claimed as a dependent on someone else’s current-year tax return.

HSA Eligibility Requirement #3: No Medicare Enrollment

Enrollment in any part of Medicare is disqualifying coverage that causes an individual to lose HSA eligibility. This means that an individual who is enrolled in Medicare Part A, Part B, Part C, Part D, or any combination thereof is not eligible to make or receive HSA contributions. Even enrollment in only the (generally premium-free) Medicare Part A hospital coverage blocks HSA eligibility.

For more details:

• Newfront Medicare for Employers Guide

• How Medicare Affects HSA Eligibility

Individuals Who Are Age 65+ May Still Be HSA Eligible
Medicare enrollment causes an individual to lose HSA eligibility. However, many employees age 65 and older delay enrollment in Medicare, and therefore may continue to be HSA-eligible. In other words, mere eligibility to enroll in Medicare has no effect on the individual’s HSA eligibility if the individual chooses not to enroll in any part of Medicare.

The Medicare Part A Automatic Enrollment Trap: Individuals Receiving Social Security Retirement Benefits
Individuals who are receiving Social Security retirement benefits are automatically enrolled in (premium-free) Medicare Part A hospital coverage with no opt-out permitted. Accordingly, any individual receiving Social Security retirement benefits is not HSA eligible by virtue of the automatic Medicare Part A enrollment.

The Medicare Part A Retroactive Enrollment Trap: Six Months of Retroactive Coverage
For individuals who delay enrolling in Medicare until after age 65, the Medicare Part A enrollment will be effective retroactively up to six months. This six-month retroactive enrollment in Medicare Part A will also block HSA eligibility retroactively for six months.

Individuals have two options to address the retroactive Medicare Part A enrollment causing the retroactive loss of HSA eligibility:

• Plan Ahead: Stop making HSA contributions at least six months before applying for Medicare, and limit HSA contributions during that period to the prorated amount; or

• Correct Mistake: Work with the HSA custodian to take a corrective distribution of the excess contributions by the due date (including extensions) for filing the individual tax return (generally April 15, without extension).

Example 1:

• Jacob reaches age 65 in August 2024 but does not enroll in Medicare.

• Jacob signs up for Social Security benefits on October 1, 2025, which automatically enrolls him in Medicare Part A retroactive to April 1, 2025.

Result 1:

• Jacob retroactively loses HSA eligibility as of April 2025—and therefore he can contribute only 3/12 of the HSA statutory limit for 2025 (plus 3/12 of the catch-up contribution).

• If he already contributed in excess of that limit, Jacob will need to make a corrective distribution of the excess contributions by April 15, 2026 (assuming no extensions) to avoid a 6% excise tax.

HSA Eligibility Requirement #4: Cannot Be Claimed as a Tax Dependent
Individuals are not HSA-eligible if they can be claimed as a dependent on someone else’s (e.g., a parent’s) current-year tax return.

For these purposes, the HSA rules look to IRC §151 to determine whether the individual can be claimed as a tax dependent. That section addresses the ability to claim an exception for a tax dependent, however the Tax Cuts and Jobs Act (TCJA) eliminated exemptions in 2018. Nonetheless, §151 refers to the standard §152 definition of a dependent (which remains applicable), and the TCJA revisions explicitly direct taxpayers to ignore the elimination of exemptions for purposes of any references to §151. The end result after tracking through these technicalities is that the standard §152 definition of a tax dependent remains applicable for HSA eligibility purposes.

There are two categories of individuals who may be claimed as a tax dependent:

Qualifying Child
To meet the “qualifying child” tax dependent test, the child relationship must generally meet the following five requirements:

• Child Relationship: The individual’s biological child, adopted child (including legally placed for adoption), stepchild, or foster child (or a sibling, half sibling, stepsibling, or descendant of any of those individuals);

• Child Residence: The child must live with the individual for more than half the year (exceptions apply for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents);

• Child Age: The child must be under age 19 at the end of the year. If the child is a full-time student for at least five calendar months of the year, the child must be under age 24 at the end of the year. No age limit applies if the child is permanently and totally disabled;

• Child Support: The child cannot have provided more than half of his or her own support for the year; and

• Child Taxes: The child cannot file a joint return for the year.

Qualifying Relative
To meet the modified “qualifying relative” tax dependent test, the relationship generally must meet the following requirements:

• Not a Qualifying Child: The relative cannot be a qualifying child of any taxpayer;

• Member of Household: The relative must live with the individual all year as a member of the individual’s household (the “same principal place of abode”), except for certain relatives not subject to this residency requirement;

• Gross Income Test: The relative’s gross income for the year must be less than $5,200 (2025 limit, indexed)

• Support Test: The individual must provide more than half of the relative’s total support for the year; and

• Citizen/Resident Test: The relative must be a U.S. citizen, U.S. resident alien, U.S. national, or resident of Canada or Mexico.

Important Notes:

• This is just a general overview of tax dependent status.

• For more details on the test to be a qualifying child or qualifying relative, see IRS Publication 501.

• Employers should not provide personal income tax advice—any questions about tax dependent status should be referred to the employee’s personal tax advisor.

• A spouse is never considered to be a tax dependent of the other spouse.

• The definition of a tax dependent is modified for other purposes, including eligibility for a tax-free HSA distribution or for tax-free coverage under a health plan such as an HDHP.

• The HDHP definition of an eligible child will permit coverage to age 26 per the ACA requirements regardless of whether the child is a tax dependent.

Example 2:

• Michael Dawson has HDHP coverage for himself and his 18-year old child Walt through his employer Linus & Associates.

• Walt meets the definition of Michael’s qualifying child in the current year, and therefore can be claimed as a dependent on Michael’s current-year tax return.

Result 2:

• Walt is not HSA-eligible because he is eligible to be claimed as a dependent on Michael’s current-year tax return.

• Walt therefore cannot establish and contribute to an HSA in his own name.

• Assuming Michael has no other disqualifying coverage, Michael can make and receive HSA contributions up to the family contribution limit in his own HSA.

Limited Employer Role in Determining HSA Eligibility
HSA eligibility is generally an individual income tax issue that does not involve the employer. Therefore, with limited exceptions, the employer is not responsible for determining the HSA-eligible status of employees.

Employers are responsible for confirming only the following three items with respect to an employee’s HSA eligibility:

• Whether the employee is covered by an HDHP sponsored by that employer;

• Whether the employee has any disqualifying coverage sponsored by that employer; and

• The employee’s age for determining eligibility for catch-up contributions. (Employers may rely on employees’ representations as to their date of birth.)

Most importantly, employers are not responsible for determining or monitoring whether employees have any outside disqualifying coverage. For example, this means it is not the employer’s responsibility to verify:

• Whether the employee is enrolled in non-HDHP coverage through a spouse, domestic partner, or parent;

• Whether the employee’s spouse is enrolled in a general purpose health FSA (which is disqualifying coverage for both the spouse and employee); or

• Whether the employee is enrolled in any part of Medicare.

Any such disqualification coverage issues related to a plan not sponsored by the employer are exclusively the employee’s responsibility because they are purely an individual income tax issue. Where an employee has outside disqualifying coverage, they should work directly with the HSA vendor to process any required corrective distributions by the tax filing deadline (generally 4/15) to avoid the 6% excise tax on the excess (ineligible) contributions. This process will not involve the employer.

For more details:

• Employer HSA Contributions

• Correcting Excess HSA Contributions

HSA Eligibility is Determined on an Individual-by-Individual Basis
Employees are often confused about whether the disqualifying coverage of a spouse or child covered as a dependent under the HDHP will affect the employee’s HSA eligibility. Whether the employee’s spouse or child has other disqualifying coverage (e.g., Medicare, other non-HDHP coverage such as an HMO or PPO) is relevant only in that it means the spouse or child with disqualifying coverage is unable to establish and contribute to an HSA in their own name. A family member’s disqualifying coverage does not affect the employee’s HSA eligibility, access to the family contribution limit, or the ability to take tax-free medical distributions for the employee, spouse, or child.

Example 3:

• Charles Widmore has HDHP coverage for himself, his wife Vivian, and his 25-year-old child Penny through his employer the Widmore Corporation.

• His wife Vivian is also enrolled in Medicare, and his child Penny also has HMO coverage through her employer.

Result 3:

• The disqualifying coverage of his spouse and child do not affect Charles’s HSA eligibility.

• Assuming Charles has no other disqualifying coverage, Charles can make and receive HSA contributions up to the family contribution limit in his own HSA.

• Vivian and Penny both have disqualifying coverage that block each of them from establishing and contributing to an HSA in their own name—but this has no effect on Charles’s ability to make or receive HSA contributions.

HSA Eligibility is Determined as of the First Day of the Calendar Month
Individuals must satisfy the four HSA eligibility requirements as of the first day of the calendar month to be HSA-eligible for that month. This means that a mid-month enrollment into an HDHP (e.g., for a new hire with date-of-hire eligibility) will not result in HSA eligibility until the following month. Likewise, a mid-month loss of HDHP coverage (e.g., a terminated employee with coverage ending date of termination) will not cause a loss of HSA eligibility for that month.

Example 4:

• John Locke is hired March 15 by the Toy Superstore as an assistant manager.

• He enrolls in the company’s HDHP effective date of hire.

• John terminates employment with the Toy Superstore as of November 15 to join Big Box, Inc. as of December 1.

• He loses his HDHP coverage effective as of the date of his termination and does not elect COBRA.

Result 4:

• John is not HSA-eligible for the month of March because he did not have HDHP coverage as of the first day of the month.

• This means he cannot start making or receiving HSA contributions until April.

• John is HSA-eligible for the month of November—even though he only had coverage for a partial month—because he was covered by the HDHP as of the first day of the month.

Reminder: Loss of HSA Eligibility Does Not Affect Ability to Take Tax-Free Medical Distributions
Individuals do not have to maintain HSA eligibility (i.e., the ability to make or receive HSA contributions) to take tax-free distributions for medical expenses.

This means an HSA owner can:

1. Build up an HSA balance, move to non-HDHP coverage in a subsequent year, and still use that HSA (after losing HSA eligibility) to cover qualifying medical expenses tax-free; and/or

2. Incur but not reimburse qualifying expenses while HSA-eligible, move to non-HDHP coverage in a subsequent year, and still use that HSA (by preserving the

   “shoebox” of health receipts) to reimburse those expenses incurred while HSA-eligible.

HSA eligibility is relevant only for determining the ability to make or receive HSA contributions—not for purposes of taking tax-free medical distributions.

Example 5:

• Desmond Hume had HDHP coverage when he worked as a set designer for the U.S. division of the Royal Shakespeare Company in 2024, during which he made and received HSA contributions.

• Upon terminating employment, he had a remaining balance of $1,500 in his HSA.

• Desmond subsequently is not HSA-eligible because his next job at Moriah Vineyards in 2025 does not offer an HDHP.

• While employed at Moriah Vineyards and covered by a standard HMO, he experiences a concussion and has $1,500 in out-of-pocket medical expenses related to the injury.

Result 5:

• Upon his loss of HSA eligibility, Desmond can still continue to incur medical expenses and take tax-free medical distributions from his HSA to pay for those expenses.

• Desmond can therefore use his remaining HSA balance to pay for the $1,500 medical expenses he incurred related to his concussion even after losing HSA eligibility.

• The only consequence of his loss of HSA eligibility is that Desmond cannot make or receive any HSA contributions in 2025 or any future year—unless he regains HSA eligibility.

Summary
HSA eligibility is the key to unlocking access to the triple-tax advantaged HSA. The HSA is a personal trust account, and therefore many of the issues associated with eligibility are personal income tax matters that do not involve the employer. However, employers do maintain a limited role in monitoring HSA eligibility where facilitating employer and/or employee contributions through payroll—as is the norm for employers offering HDHP coverage. Employers should be familiar with the HSA eligibility rules both for purposes of their limited range of responsibility and addressing the common (and usually quite basic) questions employees often raise in this area.

Stay tuned for the next posts covering the HSA contribution and distribution rules!

Relevant Cites:

IRC §223(b):
(6) Denial of deduction to dependents.
No deduction shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual's taxable year begins.
(7) Medicare eligible individuals.
The limitation under this subsection for any month with respect to an individual shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter.

IRS Notice 2004-50:
Q-2. May an otherwise eligible individual who is eligible for Medicare, but not enrolled in Medicare Part A or Part B, contribute to an HSA?
A-2. Yes. Section 223(b)(7) states that an individual ceases to be an eligible individual starting with the month he or she is entitled to benefits under Medicare. Under this provision, mere eligibility for Medicare does not make an individual ineligible to contribute to an HSA. Rather, the term “entitled to benefits under” Medicare means both eligibility and enrollment in Medicare. Thus, an otherwise eligible individual under section 223(c)(1) who is not actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that individual is enrolled in Medicare.
…
Q-81. Are employers who contribute to an employee’s HSA responsible for determining whether the employee is an eligible individual and the employee’s maximum annual contribution limit?
A-81. Employers are only responsible for determining the following with respect to an employee’s eligibility and maximum annual contribution limit on HSA contributions: (1) whether the employee is covered under an HDHP (and the deductible) or low deductible health plan or plans (including health FSAs and HRAs) sponsored by that employer; and (2) the employee’s age (for catch-up contributions). The employer may rely on the employee’s representation as to his or her date of birth.

IRS Notice 2008-59:
Q-5. Does an individual fail to be an eligible individual merely because the individual is eligible for, but not enrolled in, Medicare Part D (or any other Medicare benefit)?
A-5. No. However, an individual is not an eligible individual under § 223(c)(1) in any month during which such individual is both eligible for benefits under Medicare and enrolled to receive benefits under Medicare. See also Notice 2004-50, Q&A-2 and 3, regarding Medicare Parts A and B.

IRC §151:
(c) Additional exemption for dependents.
An exemption of the exemption amount for each individual who is a dependent (as defined in section 152) of the taxpayer for the taxable year.

IRS Notice 2004-2:

Q-28. How are distributions from an HSA taxed after the account beneficiary is no longer an eligible individual?
A-28. If the account beneficiary is no longer an eligible individual (e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has an HDHP), distributions used exclusively to pay for qualified medical expenses continue to be excludable from the account beneficiary’s gross income.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).