Can my claimed tax dependent children use of non-custodial parents HSA funds without being claimed on their taxes?

[movemyhorse]

I have been divorced 9 years and have primary custodial custody and financially support/provide 50% or more of the needs/requirements of the children (primary custody 1000 miles away from the other parent for no less than 75% of the year - 255 days). I have therefore claimed the kids as my dependents on taxes every year for the child tax credit and refunds. Also, my ex makes approximately 75% more annually and the child tax credit was no benefit of those returns, so it was agreed my refund would better support the children each year if I claimed and received a refund.

There is an Employer Contributed HSA account and insurance coverage. The children remained on the non-custodial parents' insurance policy and continued using the HSA account for Approved Medical Expenses, per our divorce agreement. I also qualified for and used state Medicaid for the children to limit the use of the HSA account. Our agreement states the HSA account will pay all approved medical expenses 100% until depleted and then expenses are to be split per child support calculations on the dollar. I pay OOP for most things in order to get credit card points, then request a reimbursement for the approved expenses from the HSA at the beginning of the following year after I prepared my taxes and properly sorted HSA paid and personal paid for deductions. I also supply support documents to show approved HSA expenses. We have done this for 15 plus years, even when married, and never had issues. My ex is now claiming that the HSA was illegally used all these years, and the children need to be claimed as dependents by them in order to use the HSA funds and is demanding I personally re-pay all funds used plus the 20% penalties/fees, as well as amend my taxes for the last 3 years and also pay all those penalties and fees. 

I need clarification on

A) I am legally in the right to have claimed, and continue claiming, the children based on being the primary custodial parent and provide 50% minimum financial support, or

B) does the rule of "only a claimed dependent" is legally able to use the HSA funds and in fact could VOID my status A, meaning I could potentially have to be out thousands of dollars to re-pay and amend all my taxes?

C) One child is 22 and files their own taxes, so would that child have to also amend their taxes in order to be "compliant" with the HSA rule? They are not a FT student.

Any and all clarification, IRS Publication references are welcome and/or specific codes, rules, laws, etc. that I can be directed to are appreciated!

[Bsch4477]

see pub 969.

“A child of parents that are di-
vorced, separated, or living apart for the last 6 months of the calendar year is treated as the de-
pendent of both parents whether or not the custodial pa-
rent releases the claim to the child’s exemption. 

Clearly the ex’s HSA can be used for the child’s expenses. What I don’t understand is why you are involved in the payment of the expenses. The HSA is the ex’s so they should pay the expenses and those expenses would be reported on their return. 

[Mike9241]

your ex's HSA has nothing to do with your right to claim qualifying dependents.

from IRS PUB 969 page 9

https://www.irs.gov/pub/irs-pdf/p969.pdf 

Qualified medical expenses are those incurred by the
following persons.
1. Your spouse and you. You are no longer his spouse so any medical expense he paid out of his HSA to cover your medical expenses would not qualify
2. Not relevant since it is not your HSA
3. Any person he could have claimed as a dependent on his return except that:
a. The person filed a joint return;
b. The person had gross income of $4,700 (2023 -$5050 for 2024) or more; or
c. not relevant since not filing jointly
For this purpose, a child of parents that are divorced, separated, or living apart for the last 6
months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child’s exemption.

C) One child is 22 and files their own taxes, so would that child have to also amend their taxes in order to be "compliant" with the HSA rule? They are not a FT student.

if this child has more than $5,050 in gross income for 2024. they can not be claimed by you as a qualifying relative on your return.  Because they are over 19 and not a full-time student you can not claim them as a qualifying child.

[movemyhorse]

It is the "6 months of the year" that is causing issues because we have been divorced for almost 9 years. The ex and new spouse tend to "read into things" so it says what they want it to say. I am trying to gather the legal evidence to show/prove/support they are wrong. They like to "muddy the waters" and cause issues recently (new spouse with control and trust issues with my ex). This is a "them problem" but I got drug into legally.

I was on the HSA as an approved user since we got the account 15 yrs ago, and because the kids and I live over 1000 miles away, for me to pay the bills on behalf of the kids just made sense and our oldest started paying their own bills from the HSA a couple years ago. I am a bookkeeper so have always handled the books and have all the evidence to support "approved medical expenses" which they originally claimed I didn't, so have moved on the taxes being a legal issue because the first attack has failed, so far. We never had an issue until September...new spouse issues started all this. We have only 6 months left until the youngest leaves for college and possibly not a dependent to anyone but would still eligible to use the HSA account as a non-dependent and have their own card to pay for any expenses.  This issue is now also causing issues with that youngest going to college because the ex makes too much money to qualify for any grants, aide, etc.

I know the rules and laws but need additional clarification to prove it and get this all dropped and put behind.

Thank you for your response

[Opus 17]

Ignore the 6 months.  Those commas should be read as OR statements.

A child of parents that are [divorced1] OR [separated2] OR [living apart for the last 6 months of the calendar year3] is treated...

You meet the first OR statement, you can ignore the others.

A person who owns an HSA may use the funds to pay for qualifying medical expenses for themself, their spouse, and their dependents, including children who could be their dependents except for divorce.

If they don't want to pay, that is something you have to work out with them, possibly through an attorney.  They aren't required by the tax law to use their HSA for anything, including their kids.  But it would not be taxable to them if they did use the funds in that manner, provided that the children meet the other tests to qualify as dependents (under age 19, or under age 24 and a full time student, does not support themselves, etc.)