The HSA will be treated as the parent’s HSA until the child reaches age 18. At that time, it would become the child’s HSA. As the bill is currently drafted, any distributions taken out of the HSA before the child’s 18th birthday would be included in the parent’s taxable income. Nonqualified distributions would also be subject to an additional 20 percent penalty tax. Once the child turns 18, distributions would be considered qualified only if they were taken while the child was not a dependent on the parent’s insurance (the child could be treated as the parent’s dependent for certain permitted insurance, but not for the parent’s health plan).
If the child were to become disabled or die, the parent would no longer be able to make contributions, but could roll over any HSA assets to their own IRA or HSA, or to another child’s HSA.
If enacted, this legislation would become effective for tax years beginning after the date of enactment. Any progress of the bill through Congress will be monitored, and details provided as they become available.