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Who Is a Qualified Dependent?

There is a distinct difference between the definition of "dependent" for health plan and MSA purposes and the definition of dependent for HSA purposes.

General Definition of Dependent under Code Section 152:

Code section 152 has a two prong definition of "dependent" effective 1/1/05: 1) qualifying child and 2) qualifying relative. A qualifying child is any "child" (son, daughter, brother, sister, niece, nephew, grandchild) who a) will not be age 19 during the year (or 24 if a full-time student), except that a disabled "child" is considered as satisfying the age requirement despite actual age b) has the same principal place of abode as the taxpayer for more than half the year and c) does not provide over half of his/her own support. A qualifying relative is any individual who a) is not a qualifying child of any other person b) has income less than the exemption amount ($3200 for 2005) c) receives over half of his or her support from the taxpayer and d) if a non-relative, resides with the taxpayer the entire year. NOTE: A "dependent" of another taxpayer cannot claim dependents and married children who file a joint return with their spouse cannot be claimed as a dependent by someone other than the spouse even if the qualifying child/qualifying relative requirements are otherwise met by another taxpayer.

There is a special rule for children of divorced parents and where individuals receive over half of their support from more than 1 person. With regard to children of divorced parents, the parent with custody for the greater portion of the year is considered as providing over half of the child's support and can claim the exemption except where that has been transferred to the non-custodial parent. For individuals who received 50%+ support from more than 1 person, the person who can claim that individual as a dependent is the person who a) provided over 10% of the individual's support and b) the others who provided over 10% waive the exemption. In addition, the individual must receive over half of his support from 2 or more persons who could otherwise claim the individual as a dependent but for the failure to meet the 50%+ support requirement (i.e. an individual who receives over half of his support from 2 or more non-relatives not be claimed as a dependent by anyone even if they lived with one of the support providers)

General Definition of Dependent for HSA purposes:

Code Section 223 refers directly to Code Section 152 to define "dependent" with respect to whose expenses may be reimbursed tax free from the HSA. Thus, THE ABOVE IS THE RULE FOR HSAs as it stands right now (there is a technical correction before congress that would conform definition of dependent for HSAs to that which is applicable for other health plans and MSAs). Note the differences between dependent for HSA purposes and for Health plan and MSA purposes as set forth below:

General Definition of Dependent for Health Plans and MSAs:

The definition of "dependent" for health plans and MSAs is slightly different. For Code 106/105 health plans, and for Code Section 220 MSAs (and for purposes of the income tax deduction under Code Section 213(a)), a "dependent" is generally a Code Section 152 dependent with the following exceptions:

1) the income limitation for qualifying relatives DOES NOT APPLY [Thus, an individual who would otherwise be a qualifying relative but for the fact that he/she has income equal to or in excess of the exemption amount can receive tax free health coverage under a health plan and/or MSA BUT NOT TAX FREE HSA COVERAGE.]

2) Children of divorced parents are considered dependents of both parents so long as over half of the child's support is received from his parents and the child lives with one of the parents. THIS DOES NOT APPLY TO MSAs. [Thus, a child who is claimed by the custodial parent on the custodial parent's tax return may be covered under the non-custodial parent's health plan (assuming the support is received by the parents together) despite the fact that the custodial parent claims the child as a dependent on his/her tax return; that same child could not receive tax free coverage under the non-custodial parent's HSA or MSA]

3) "Dependents" can cover their "dependents". [This is a mute point because an individual who can be claimed as a dependent cannot establish an HSA to begin with so we don't run into this issue on the HSA side]

4) Individuals can cover their married children who otherwise meet the applicable requirement provided the child does not file a joint tax return with his or her spouse.