Can our family use HSA if our adopted children will have Medicaid coverage?

You can still have an HSA, but with some important considerations. The HSA eligibility is determined by the HDHP coverage of the account holder - which would be you and possibly your wife depending on how you set it up. If you and your wife are covered by a qualifying HDHP, you can still contribute to an HSA even if your dependents have other coverage like Medicaid. The key distinction is that you can only use HSA funds tax-free for qualified medical expenses of tax dependents who are actually covered under the HDHP. So you could use your HSA for expenses for yourself, your wife, and your biological daughter (assuming she's on your HDHP), but you couldn't use HSA funds for medical expenses for your adopted children on Medicaid without paying taxes and penalties on those distributions.

I was in a really similar situation last year and found this amazing tool that helped me sort through these exact HSA questions with adoption. I spent hours trying to figure out all the rules and getting different answers from insurance people vs tax people. Finally found https://taxr.ai which lets you upload tax docs, insurance docs, or even just describe your situation and it gives you clear answers with actual tax code citations. I uploaded our insurance summary and adoption paperwork and got confirmation about exactly what we could claim and how to handle the HSA situation. Saved me a ton of stress!

Just want to follow up and say I tried that taxr.ai tool after seeing it mentioned here, and it was seriously helpful! I uploaded my insurance declarations page and a summary of our adoption situation (we're adopting through a different program but with similar medicaid questions). It gave me super specific guidance about what documentation we need to keep and exactly how to handle the HSA contributions vs. which expenses we can use the HSA for. It even created a custom letter explaining our situation that we can give to our tax preparer next year. Didn't expect it to be that thorough!

Something else to consider - have you tried calling the IRS directly to get an official answer? I know it sounds impossible to get through, but I used this service called https://claimyr.com and they got me connected to a real IRS agent in under 20 minutes when I had a complicated tax question about dependents and health insurance. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c I was dealing with a complicated situation with my sister's kids who I have custody of but not legal adoption, and needed to confirm how their CHIP insurance affected my tax situation. The IRS agent was actually really helpful and gave me official guidance I could rely on for my tax return.

I have to eat my words about the Claimyr service. After my skeptical comment, I decided to try it because I was getting nowhere with my own attempts to reach the IRS about our adoption tax credit questions. It actually worked exactly as described - I got connected to an IRS agent in about 15 minutes instead of the 1+ hour wait I experienced on my previous attempts. The agent confirmed everything about the HSA/Medicaid situation and also gave me some helpful info about documenting our adoption expenses for the adoption tax credit. I'm still shocked it worked so well!

One thing to consider - if the adopted kids qualify for Medicaid, you may also qualify for the adoption tax credit, which is up to $15,950 per child for 2025. This credit helps offset qualified adoption expenses like court costs, attorney fees, etc. It's separate from the HSA issue but definitely worth looking into if you haven't already. The credit is non-refundable but can be carried forward for up to 5 years.

Has anyone actually asked your adoption agency or the state Medicaid office about this? When we adopted our son from foster care, we contacted our state Medicaid office directly and they had a whole packet about how adoption assistance and Medicaid work with private insurance. Each state can have slightly different rules.

Congratulations on your adoption! This is such a wonderful thing you're doing. I went through a similar situation with my nephew who we adopted from foster care last year. One thing I learned that might help you - make sure to keep detailed records of which medical expenses you pay with your HSA versus which ones are covered by Medicaid for your adopted children. I created a simple spreadsheet tracking this because come tax time, you'll want to be able to show that you only used HSA funds for eligible expenses. Also, don't forget that even though your adopted kids will have Medicaid, there might still be some medical expenses that aren't fully covered - things like certain therapies, dental work, or vision care that go beyond basic coverage. For those expenses, you'd need to pay out of pocket (not from your HSA) unless you add them to your HDHP coverage later. One last tip - if your adopted children have any ongoing medical needs from their time in foster care, document everything thoroughly. This will help with both the adoption tax credit and potentially qualifying for additional state benefits down the road.