Have both HSA and FSA - What to do?

[Guest trainer5740]

I seem to have gotten myself into a bit of a mess. During open enrollment last fall, I enrolled in my company's new HDHP with an HSA, the first time I'd enrolled in an HSA. Reading through all of the literature they provided, it stated that an individual could not enroll in an HSA AND a general-use FSA. It did not say anything about a spouse not being able to contribute to an FSA. Maybe I should have intuited it, but I didn't. My husband enrolled in his company's PPO with an FSA. In conversation with a colleague last week, I heard for the first time that I could not have an HSA while my spouse has an FSA. (This wasn't mentioned in any of the enrollment materials or webinars or WBTs I read/attended/completed, which is a bit beside the point but really infuriates me.)

My contributions to the HSA are $3000 for the year, the individual max; my husband's to his FSA are $1200. We did this to cover expenses for both of us, since my HSA can't be used for his expenses since he's not on my plan. Had I known we couldn't have both, I would have opted out of the HSA and funded his FSA up to around $3000 total.

So now I'm not sure what to do. A tax person I know says to call my HR Dept and have them back me out of the HSA, since technically they should not have allowed me to enroll. I'm sure they'll do that in the interest of saving their own skin. What's giving me anxiety (and I'm having a lot of it right now) is that doing so will leave us with only $1200 in the FSA, which doesn't even touch my $1500 deductible, and I'm sure my husband's employer won't let him increase his contributions since it's well past open enrollment. All of this meaning that if I back out of the HSA I need to avoid going to the dr at all costs or be stuck with a hefty bill to foot out-of-pocket.

Do I have any other options? Would it work if I use ONLY HSA funds to cover my deductible-applicable expenses, and not use the FSA funds for anything for me (which I wasn't planning on anyway)? What if I claim the HSA contributions as taxable income on my 2009 taxes?

I feel like an absolute idiot, especially since I did all of the research I could with what was made available to me, but that apparently wasn't enough. And, quite frankly, I'm scared to death, both of breaking the law and being stuck in a really nasty situation with a lack of health care funds - I'm absolutely sick about this. Any and all suggestions would be appreciated.

[J Simmons]

Exhaust the $1,200 general-use FSA as quickly as you can. For months after that, you will again be eligible for tax-free contributions to your HSA. For example, if you and your husband use all that $1,200 FSA by the end of February, you are then are eligible to make contributions to the HSA for March and later months.

[Guest trainer5740]

Thank you so much - brilliant idea. I called my HR dept and they were completely confused, had no idea why my situation was a problem. Guess that would explain why it wasn't in the materials. (The best part? I WORK for the health care plan!)

At any rate, they've stopped my contributions, but can't back out what we've contributed so far, so I guess when we file next year we'll just count that as taxable income. I have no idea if the employer contributions are going to continue - the woman on the phone was so confused, I didn't even want to go down that road. If they do, I guess we'll count those as taxable income as well. In the meantime we'll spend out the FSA.

Here's what gets me about this though... We had planned on $3000 in the HSA, $1200 in the FSA, which would cover both of our deductibles along with other health care expenses, such as accupuncture, that are not covered. The max I can contribute to the HSA is $3000. So, since now we know my husband can't have an FSA, that means that we're limited in what we can contribute, and can't even get up to the HSA family max. It's essentially a penalty for being on two different plans where only one is a HDHP.

My goal for this year? To spend out the HSA and go onto my husband's plan. This is a royal pain.

One last question (because the person on the phone also was confused about this): Even tho my husband is covered on a non-HDHP, I CAN use the funds in my HSA (once I start it back up) to cover his medical expenses, correct?

Thank you again!

[J Simmons]

Thank you so much - brilliant idea. I called my HR dept and they were completely confused, had no idea why my situation was a problem. Guess that would explain why it wasn't in the materials. (The best part? I WORK for the health care plan!)

At any rate, they've stopped my contributions, but can't back out what we've contributed so far, so I guess when we file next year we'll just count that as taxable income. I have no idea if the employer contributions are going to continue - the woman on the phone was so confused, I didn't even want to go down that road. If they do, I guess we'll count those as taxable income as well. In the meantime we'll spend out the FSA.

Here's what gets me about this though... We had planned on $3000 in the HSA, $1200 in the FSA, which would cover both of our deductibles along with other health care expenses, such as accupuncture, that are not covered. The max I can contribute to the HSA is $3000. So, since now we know my husband can't have an FSA, that means that we're limited in what we can contribute, and can't even get up to the HSA family max. It's essentially a penalty for being on two different plans where only one is a HDHP.

My goal for this year? To spend out the HSA and go onto my husband's plan. This is a royal pain.

One last question (because the person on the phone also was confused about this): Even tho my husband is covered on a non-HDHP, I CAN use the funds in my HSA (once I start it back up) to cover his medical expenses, correct?

Thank you again!

Yes. The HDHP coverage requirement only applies for being able to contribute to the HSA. To withdraw from the HSA without taxation simply requires you have medical expenses.

For future years, if your ER offers an FSA that limits use to preventive, dental, supplemental or specific illness expenses, or is general use but imposes a deductible that is the amount required for HDHP, then you can get extra dollars through such an FSA and have your HSA contrbutions too.

[Guest trainer5740]

Thank you so much John! Needless to say, you've been far more helpful than my HR department.

[Guest jackmo]

You will start making HSA contributions again when your husbands FSA is spent down to zero. Under the "full contribution rule", you will be able to make the full annual contribution for 2009, even though there are/were months that you were not eligible to do so. No problem with that. So it seems to me that you both will have the full advantage of the $3,000 and $1,200 that you originally planned for--the only difference being that you will be paying more of the $3,000 contribution (no employer contribution during those months you are/were ineligible). HOWEVER--

Here's where your potential future problem will be (in addition to the ones you already have): Once you take advantage of the full contribution rule, you then subject yourself to an IRS 13 month test period. You mentioned getting thru 2009 and then going into your husband's plan--which you won't be able to do on 1/1/10 IF you take advantage of the full contribution rule for 2009--without FURTHER adverse tax consequences.

To avoid the 13 month test period, you will need to prorate your 2009 contributions. For example, if you become HSA eligible again March 1st, then you will need to figure 10/12ths of 3,000 as the max you can put in for 2009. This will allow you to go on your husband's plan 1/1/10, with no further adverse tax consequences.

[Guest trainer5740]

Wow - thanks for that information. I never would have known that. I was planning on doing catch-up contributions to get us to $3000 for the year, but it sounds like I'll be safer to pro-rate it in order to allow us options in 2010.

I am truly amazed at how incredibly complicated the government has made these plans. How can the average person be expected to know all of this?

Thanks again.

[J Simmons]

Who is expecting the average person to understand all this? Unfortunately, if it is Congress or the IRS they're delusional.