Recently employed dependent child and HSA contributions

Question

My 23 year old daughter graduated from college in June of ’24, got a job in August and signed up for a high deductible health plan with her employer. She then elected to participate in an HSA and contributed $1,500 from Aug-Dec of last year.  We’re doing her taxes In TurboTax Deluxe Desktop, and are getting errors about having excessive contributions since I am claiming her as a dependent on my own return.  Is she not eligible to maintain and contribute to an HSA while she’s my dependent?  If she can, does she have to pay taxes on the total amount contributed?  How do I manage this in TT because at one point, the amount of her excess contributions doubled from what showed on her W-2, why was that?  What is the correct way to handle this in the software as we seem to be stuck in an endless loop of checking and unchecking boxes that says she was covered by the plan for part of the year and no plan for the remaining months (she was on my health plan before she started work). Incidentally, she did have a small disbursement from her HSA account to pay for a medical related expense but the bulk of it is still there.

maglib · Answer

@jfm2023

The IRS has the following requirements for individuals to qualify for an HSA and sadly if you claim her, she can not have an HSA:

Enrolled in a high deductible health plan (HDHP) with no other disqualifying health coverage that pays for treatment before a deductible is reached.
Not enrolled in Medicare
Not claimed as a dependent on another person's current year tax return

Another note is your daughter should be covered by your healthcare plan till 26.

Your daughter can have the HSA reversed as IRS changed rules:
IRS Notice 2008-59
In Notice 2008-59, the IRS clarified limited circumstances under which an employer may recoup contributions
that it makes to an employee’s HSA. These limited circumstances are:
If an employee was never eligible for HSA contributions (that is, the employee never met the eligibility
criteria for an HSA); or
If an employer contributes amounts to an employee’s HSA that exceed the maximum annual
contribution amount due to an error.
In these circumstances, Notice 2008-59 says, the employer may request that the financial institution return to
the employer the mistaken or excess amounts contributed to the employee’s HSA.
However, Notice 2008-59 also states that the employer may not recover amounts contributed that are less
than or equal to the maximum annual contribution limit, even if made in error. Also, Notice 2008-59 says that
if an employer contributes to the HSA of an employee who ceases to be an eligible individual during a year,
the employer may not recover contributions made after the employee stopped being eligible.
New IRS Information Letter
The IRS’ Office of Chief Counsel recently released an information letter (Letter 2018-0033) that clarifies the
ability of employers to recover contributions to employees’ HSAs that were made by mistake. This
information letter expands on the guidance in IRS Notice 2008-59 by allowing employers to recover HSA
contributions in more situations.

HSA information is entered in 2 sections of TurboTax. First in Wages & Income as a W-2, 12 code W. But then you have to also enter it in the Deduction & Credits section under HSA, MSA Contributions too. So long as you meet all the requirements such as only using the HSA distributions for medical purposes and having a high-deductible health plan (HDHP) then your contributions on the W-2, box 12, Code W will not be taxed.

Tax Tip: If you took any distributions from your HSA then you will receive a 1099-SA.

Have you done an analysis to see if it is better for your daughter to claim herself? Is she eligible still to be your dependent? https://www.irs.gov/pub/irs-pdf/p501.pdf

Tests To Be a Qualifying Child Tests To Be a Qualifying Relative
1. The child must be your son, daughter, stepchild, foster child, brother,
sister, half brother, half sister, stepbrother, or stepsister, or a descendant
of any of them.
2. The child must be (a) under age 19 at the end of the year and younger
than you (or your spouse if filing jointly); (b) under age 24 at the end of the
year, a student, and younger than you (or your spouse if filing jointly); or
(c) any age if permanently and totally disabled.
3. The child must have lived with you for more than half of the year.2
4. The child must not have provided more than half of the child’s own support
for the year.
5. The child must not be filing a joint return for the year (unless that joint
return is filed only to claim a refund of withheld income tax or estimated
tax paid).
If the child meets the rules to be a qualifying child of more than one
person, generally only one person can actually treat the child as a
qualifying child. See Qualifying Child of More Than One Person, later,
to find out which person is the person entitled to claim the child as a
qualifying child.
1. The person can't be your qualifying child or the qualifying
child of any other taxpayer.
2. The person either (a) must be related to you in one of the
ways listed under Relatives who don't have to live with you, or
(b) must live with you all year as a member of your
household2
(and your relationship must not violate local law).
3. The person's gross income for the year must be less than
$5,050.3
4. You must provide more than half of the person's total support
for the year.