Spouse added FSA, I have HSA, what to do?

[Mike32966]

Hi, I'm looking for some guidance on how to unravel a mess we've created with adding both an FSA and HSA for 2023.

My wife started a new job with her own healthcare coverage and added an FSA with $250 for 2023.  I have a HSA maxed at $3850 and partly paid by my employer.   She didn't realize this would create a problem with having both FSA and HSA in the same year and it's too late now to change the plans. 

I found an older post here from 2009 and wanted to confirm that the advice was still current. The post says to suspend contributions to the HSA and to spend down the FSA asap.  Once the FSA is empty, restart the HSA contributions and I can then contribute up to the annual amount.  I'm also seeing conflicting posts that say FSA coverage applies to the whole year regardless of whether it's spent down so disqualifies HSA contributions for the whole year. 

It also doesn't say if there are penalties or what to do with any money contributed to the HSA.  What happens to this money?  Does it need to be removed from the HSA and/or taxed at the end of the year?  Can I continue with contributions to the HSA and just pay the tax?

I also found a post about the possibility that her FSA may include a clause where "the spouse can elect that the money in the FSA can only be used by family members not covered by the HSA" so checking that out.  

I'm looking for any help on what to do next.  Any suggestions would be appreciated.

[Brian Gilmore]

Yeah that's a bummer.  Happens all the time unfortuantley.

The spouse's general purpose health FSA is unfortunately disqualifying coverage for both the spouse and you.  Spending the health FSA down to zero doesn't change that.  The health FSA will remain disqualifying coverage for both you and the spouse for the full plan year.  The only exception would be if the spouse revokes the health FSA (permitted election change event needed) or terminates (and doesn't elect COBRA for the health FSA)--in which case you could prospectively start HSA contributions on a prorated limit basis (HSA eligibility is determined as of the first day of each calendar month).

• Here's an overview: https://www.newfront.com/blog/hsa-interaction-health-fsa-2

I recommend notifying your employer not to make the ER HSA contribution because you are not HSA-eligible.  You can revoke your EE HSA contribution election for any reason (you don't need a permitted election change event), so you'll also want to do that, too.

• Here's an overview: https://www.newfront.com/blog/hsa-contribution-election-changes-2

If you still have HSA contributions deposited before they can be stopped, I recommend working with the HSA custodian to take a corrective distribution.  That will avoid a 6% excise tax that would otherwise apply for the excess contribution.

• Here's an overview: https://www.newfront.com/blog/correcting-excess-hsa-contributions

Slide summary:

2023 Newfront Go All the Way with HSA Guide

[Mike32966]

Thanks Brian,  not what I was hoping for but exactly the information I needed.  It sounds like I'll have all the downside of the HDHP and non of the upside 😞

So do I let the plan run and correct at the end of the year or stop contributions now.  If I let it run will I receive any employer contribution in the corrective distribution or does that go to the employer? 

Not sure how I feel about that. I wouldn't have selected this plan if I wasn't to receive the employer contribution towards the deductible and keeping the full amount gets me closer to where I thought I would be.   

 

[Brian Gilmore]

Yeah it's a pickle unfortunately.  

Most employers would say this is just purely an individual income tax issue because they're not responsible for monitoring outside disqualifying coverage.  In theory you could receive the HSA contributions and then take a corrective distribution from the custodian, but the approach I mentioned above would avoid that hassle.

Here's some more details on that point:

https://www.newfront.com/blog/employer-hsa-contributions

Employer HSA Contribution Consideration #4: Limited Role in Determining HSA Eligibility

HSA eligibility is generally an individual income tax issue that does not involve the employer.  Therefore, with limited exceptions, the employer is not responsible for determining the HSA-eligible status of employees.

Employers are responsible for confirming only the following three items with respect to an employee’s HSA eligibility:

• Whether the employee is covered by an HDHP sponsored by that employer;
• Whether the employee has any disqualifying coverage sponsored by that employer; and
• The employee’s age for determining eligibility for catch-up contributions.

Employers may rely on employees’ representations as to their date of birth.

Most importantly, employers are not responsible for determining or monitoring whether employees have any outside disqualifying coverage.  For example, this means it is not the employer’s responsibility to verify:

• Whether the employee is enrolled in non-HDHP coverage through a spouse, domestic partner, or parent;
• Whether the employee’s spouse is enrolled in a general purpose health FSA (which disqualifying coverage for both the spouse and employee); or
• Whether the employee is enrolled in any part of Medicare.

Any such disqualification coverage issues related to a plan not sponsored by the employer are exclusively the employee’s responsibility because they are purely an individual income tax issue.

...

IRS Notice 2004-50:

https://www.irs.gov/irb/2004-33_IRB#NOT-2004-50

Q-81. Are employers who contribute to an employee’s HSA responsible for determining whether the employee is an eligible individual and the employee’s maximum annual contribution limit?

A-81. Employers are only responsible for determining the following with respect to an employee’s eligibility and maximum annual contribution limit on HSA contributions: (1) whether the employee is covered under an HDHP (and the deductible) or low deductible health plan or plans (including health FSAs and HRAs) sponsored by that employer; and (2) the employee’s age (for catch-up contributions). The employer may rely on the employee’s representation as to his or her date of birth.

[Peter Gulia]

BenefitsLink neighbors, I’m curious:

How much does a summary plan description explain about how coverage under an unrelated employer’s plan affects coverage under the plan the SPD explains?

And how much does a summary plan description explain about the potential tax treatments of rights and features under or related to the plan the SPD explains, and how coverage under an unrelated employer’s plan could affect the tax treatments?

How much does a summary plan description explain about a participant’s need to coordinate one’s elections with one’s spouse’s elections?

How much do SPDs explain?

How much should SPDs explain?

What’s practical? What’s impractical?

[Brian Gilmore]

The HSA is not a group health plan subject to ERISA, so there generally are no SPD terms addressing HSAs.  It's really just a tax vehicle.  Employers definitely have been making more efforts in recent years to communicate HSA features, strategies, and eligibility issues at OE, etc. both as a service to employees and to make sure employees are informed about these concerns.  Also because the HDHP is often the best plan option from a cost perspective for both parties.

[Peter Gulia]

We’re aware that many employers assume a Health Savings Account is not an ERISA-governed employee-benefit plan. For discussion, let’s assume the premise.

But should a summary plan description for a plan that is or allows high-deductible health coverage explain that having no health coverage beyond high-deductible coverage is a condition for the desired tax treatment of a Health Savings Account?

And what about other interactions? The HDHP-HSA relation is not the only one for which a participant’s spouse’s choices (whether under the same employer’s plans, or under another employer’s plans) affect a participant’s choices or other rights.

While recognizing other communications, should information of this kind also be explained in some plan’s summary plan description?

[Brian Gilmore]

Not sure what you're driving at with the assumption language, but I've copied the DOL guidance below for reference.

One of the conditions for avoiding ERISA status is that the employer not represent the HSA as an ERISA welfare benefit plan, so I wouldn't put HSA materials in an ERISA SPD.  HSAs are not viable in the hypothetical they are subject to ERISA (not sure any ERISA HSAs actually exist).

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2004-01

As noted above, HSAs are personal health care savings vehicles rather than a form of group health insurance.

...

Accordingly, we would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA.

2023 Newfront Go All the Way with HSA Guide

[Peter Gulia]

I’m aware of EBSA’s bulletins, which describe non-rule interpretations that might allow an employer, without establishing or maintaining an ERISA-governed plan, to pay employer-provided contributions into a health savings account for its employee, even one who had not created an account or assented to receiving a contribution. Likewise, an employer might restrict which health savings account providers the employer allows for employer or payroll-deduction contributions. Health Saving Accounts, Field Assistance Bulletin No. 2004-01 (Apr. 7, 2004), Health Savings Accounts—ERISA Q&As, Field Assistance Bulletin No. 2006-02 (Oct. 27, 2006). A court need not defer to any of these interpretations. See, e.g., Christensen v. Harris County, 529 U.S. 576, 586–88 (2000) (rejecting an argument that the Court should give Chevron deference to a Labor department opinion letter, and further rejecting even Auer deference); Bussian v. RJR Nabisco Inc., 223 F.3d 286, 296–97 (5th Cir. 2000) (rejecting the Labor department’s argument that the court should give Chevron deference to an interpretive bulletin). Yet, I recognize many employers follow the bulletins’ interpretations.

My questions about what some summary plan description might explain really are open, without any presumed conclusion.

Thank you for the idea that some employers might prefer to say little or nothing about Health Savings Accounts in a high-deductible group health plan’s summary plan description because a discussion might unwisely suggest, or be argued as, the employer’s implied endorsement of, or involvement with, the HSAs the employer seeks to treat as a non-plan.

[BenefitJack]

So, I missed this the first time around. Brian, Peter, wondering what you think of the following:

First, I have always thought that cafeteria plan elections were focused on the cash vs. tax-free benefit election. So, for example, back when I had brown hair, we used to have modular cafeteria plans. And, way, way back when, we would permit individuals to make a mid-yeaqr change from one module to another - where there was no change in the employee's cafeteria plan election. That is, the election was yes they wanted one of the modules. 

Second, I also thought that the cafeteria plan election was separate from the choice of coverage options under a health plan. That is the election actually being made under the cafeteria plan - per the cafeteria plan document - was cash or health coverage (not the specific health option). So, for example, if an employer offered two coverage options, and both required the same dollar amount of pre-tax contributions, can the plan sponsor (for a self-insured health plan) incorporate a plan provision that allows the individual to make a mid-year change in coverage - without affecting the cafeteria plan election? I think the answer to that is yes - since the cafeteria plan election is unaffected and we are talking about two coverage options under the same health plan. 

Third, I always wondered about taking that to the next level. Say the employer offers two health coverage options, a low option "A" and a high option "Z". The low option required an employee contribution of $100 per month, the high option $200 per month. Where the worker elected the low option during annual enrollment, if the self-insured plan so provides, can the individual continue the $100 pre-tax election and elect the higher coverage option and pay the additional $100 on an after tax basis?  I think the answer to that is also yes. 

Fourth, same as the third, except the individual elects the high coverage option "Z", and pays $200 per month in pre-tax contributions. Can this worker continue the $200 per month in pre-tax contributions and, where the self-insured plan so provides, elect the lower coverage option? I think the answer to that is also yes.  

Fifth, I also wondered about the guy (it is always the guy) who failed to enroll the spouse or children in health coverage and only signed up for single coverage. Say single coverage costs $100 a month, and family coverage costs $300 a month. Say the worker elected single coverage during annual enrollment. So, if the self-insured plan so provides, can they allow the individual to continue the $100 pre-tax election and allow the worker to enroll the spouse and/or children and pay the additional $200 on an after tax basis? Again, I think the answer to that is yes.  

So that brings me to Mike. Could Mike's wife's employer amend the Health FSA (as necessary) to provide for both a General and a Limited FSA feature? And, could the wife's employer amend the plan to allow her to make a prospective (or a retroactive to 1/1) change in FSA coverage, but not the dollar amount - leaving the cafeteria plan contribution election unchanged?

And, could the wife's employer adopt a HSA-capable health option effective 2/1/23 and allow her to make a change in coverage? 

Lastly, if Mike's wife's employer allowed for the change in FSA coverage to a Limited FSA, (how) would the last month rule apply should Mike maintain qualifyng coverage through 12/31/24? That is, he would become an eligible individual sometime after 1/1 (when the wife changed the Health FSA from General to Limited, or when the wife enrolled in HSA-capable coverage). 

 

223(b)(8)Increase in limit for individuals becoming eligible individuals after the beginning of the year.

(A) In generalFor purposes of computing the limitation under paragraph (1) for any taxable year, an individual who is an eligible individual during the last month of such taxable year shall be treated—

(i) as having been an eligible individual during each of the months in such taxable year, and

(ii) as having been enrolled, during each of the months such individual is treated as an eligible individual solely by reason of clause (i), in the same high deductible health plan in which the individual was enrolled for the last month of such taxable year.

(B)Failure to maintain high deductible health plan coverage

(i)In generalIf, at any time during the testing period, the individual is not an eligible individual, then—

(I) gross income of the individual for the taxable year in which occurs the first month in the testing period for which such individual is not an eligible individual is increased by the aggregate amount of all contributions to the health savings account of the individual which could not have been made but for subparagraph (A), and

(II) the tax imposed by this chapter for any taxable year on the individual shall be increased by 10 percent of the amount of such increase.

(ii)Exception for disability or death

Subclauses (I) and (II) of clause (i) shall not apply if the individual ceased to be an eligible individual by reason of the death of the individual or the individual becoming disabled (within the meaning of section 72(m)(7)).

(iii)Testing period

The term “testing period” means the period beginning with the last month of the taxable year referred to in subparagraph (A) and ending on the last day of the 12th month following such month.

 

[BenefitJack]

Peter, you asked:

How much does a summary plan description explain about how coverage under an unrelated employer’s plan affects coverage under the plan the SPD explains?  Some, but not all plans, highlight the issue of disqualifying coverage per (b)(7) (Medicare) or (c)(1)(A)(ii) (other disqualifying coverage). Where they offer that information, most deliver it via the enrollment materials, not the SPD. or SBC. When first adding HSA-capable coverage, I've seen plan sponsors highlight that in the SMM. 

And how much does a summary plan description explain about the potential tax treatments of rights and features under or related to the plan the SPD explains, and how coverage under an unrelated employer’s plan could affect the tax treatments? Typically, nothing is included. The best enrollment systems ask if the individual is enrolled in Medicare or if the worker is enrolled in disqualifying coverage.

How much does a summary plan description explain about a participant’s need to coordinate one’s elections with one’s spouse’s elections?  Depends. Some have opt out provisions, surcharges, etc. Others encourage the worker to coordinate elections between the two employer-sponsored plans. Where an employer-sponsored plan requires a dramatically higher employee contribution to add a spouse or other dependents to employee-only coverage, there is often a separate description – because the plan sponsor's goal of such a design is to discourage enrollment of a spouse and/or family members. (and sometimes, the employee as well). 

How much do SPDs explain?  My experience is many SPDs attempt to do too much, add too much detail, and end up where "summary" is a misnomer - attempting to serve not only as a required disclosure but also as a marketing and enrollment guide. Wrong answer. My experience is that the SPD should always be bare bones, solely focused on the mandated disclosure compliance requirements.

How much should SPDs explain? Same as above. Any other explanation should be delivered as part of the enrollment process, or when initially added, the SMM.

What’s practical? What’s impractical? As you know, a SPD must be written in a manner calculated to be understood by the average plan participant and must be sufficiently comprehensive to inform the participant of his or her rights and obligations under the plan. When it comes to today's health plans, many times "summary" and "comprehensive" are mutually exclusive. And, similarly, detailed disclosures can overwhelm the "average" plan participant. So, I have long argued that SPD’s should be returned to their original purpose under ERISA - to notify the individual of the existence of a plan, who is eligible, when and how to enroll, vesting, etc. 

But should a summary plan description for a plan that is or allows high-deductible health coverage explain that having no health coverage beyond high-deductible coverage is a condition for the desired tax treatment of a Health Savings Account? Actually, there are a number of different coverage options that are not-disqualifying coverage. But, yes, when the individual is defaulted into the cafeteria plan HSA contribution or when they voluntarily elect a HSA contribution, 21^st Century enrollment systems should pause the election process and require the worker to confirm that they (or their spouse, or a parent) do not have disqualifying coverage. Most enrollment systems preclude electing both HSA-capable coverage and a general Health FSA. Similarly, where the individual elects HSA-capable family coverage, and the individual is covering an adult child and a spouse, the enrollment system should confirm the HSA contribution limits – sharing the family contribution with the spouse, the potential for an adult child who is not a tax dependent to fully fund up to the family maximum in their own HSA, etc.  

And what about other interactions? The HDHP-HSA relation is not the only one for which a participant’s spouse’s choices (whether under the same employer’s plans, or under another employer’s plans) affect a participant’s choices or other rights.  The real challenge here is that most workers don’t read anything we provide. Similarly, some surveys suggest that a majority of workers spend only 15 minutes or less at annual enrollment - where many allow the existing elections to default into the new year. 

While recognizing other communications, should information of this kind also be explained in some plan’s summary plan description?  No. Personally, I believe the SPD is the wrong vehicle for this purpose. Here's why: (1) The SPD need not be issued in time for a new hire to make their initial benefit elections - my understanding is that new employees must receive a copy of the current Summary Plan Description (with any SMMs) within 90 days after becoming covered by the plan. (2) The SPD must be updated only once every 5 years (sometimes 10 years), (3) The SPD is often 20 - 40 - 80 pages long, and (4) The health and welfare SPDs must be provided according to 20 year old rules, often paper versions, and, as a result, they are often difficult to search or fail to ask/answer the question you have, and/or fail to prompt you to ask a question.  

[Peter Gulia]

BenefitJack, thank you for your thoroughly thoughtful and helpful information.

[UK]

Hi @Brian Gilmore . I am in the same mess as @Mike32966 described. Except that my employer contributions were already made in the beginning of the year and the employer is refusing to take it back ( can not find a way to make that happen). The employer and the HSA managing company suggested that I consider my contributions + company contributions as one block of excess contributions and return it (the HSA managing company will essentially write me a check for the entire amount) , which will become taxable. 

Will that be corrective enough in the eyes of IRS? My company is willing to part with that contribution but I am not sure if IRS will have issues with that.

 

Thanks in advance,

UK

[Brian Gilmore]

Yeah that will work as long as you take care of it by the tax filing deadline (4/15) to avoid the 6% excise tax on the excess.  

I posted a walkthrough on the steps to take a corrective distribution of the excess here: https://www.newfront.com/blog/correcting-excess-hsa-contributions

[mikestanley]

@Brian Gilmore I am so glad I came across this topic and your replies before setting up my HSA contributions for next year. Thank you.

My wife and I work for a public university and for reasons I've never fully understood, we've either needed to or been encouraged to maintain separate health insurance - something to do with our life insurance benefit through the state, I think. So for 2024 I chose the high deductible plan with HSA and my wife chose the premium PPO option for her and our son. And as we've always done, she chose to have a general purpose FSA for 2024. None of these decisions can be changed now as far as I know since open enrollment is over.

Based on this thread and reading I've done elsewhere, including other universities that make it clear one spouse cannot have an HSA while another has a general purpose FSA, I understand I'm HSA ineligible for 2024 and will not be making any contributions to the HSA. But when I called our benefits department they insisted I was eligible, and even reached out to "confirm" that with the HSA company, but also said if I had further questions I should consult a tax advisor.

I can accept I'm out of luck for 2024 on setting money aside tax-free for health expenses. Since I'm on a number of meds and see a number of specialists and will likely have at least one surgery, the HD plan will work out better for me than the PPO since my premiums and out of pocket maximum will be lower. And I guess I can just put some extra money in my 401k to try to achieve the same tax benefit.

But my concern is - must I convince my employer to withdraw their contribution to my HSA for 2024? It's only $500, and I don't plan to use any of it in 2024, but I'm worried that may still create some sort of tax liability or penalty for me. I'm just not sure how to start that conversation with the department who would, I assume, request the refund/return of the $500 employer contribution from my account, given that they basically insisted I was wrong about the whole matter to begin with. 

[Brian Gilmore]

Yes, this is a common mistake.  Probably many are making the mistake all the time who don't even know about it.

The good news is you don't need your employer's blessing to undo the $500 ER HSA contribution.  You can simply take the corrective distribution directly from the HSA custodian.  The HSA is an individually-owned account, so it's not controlled by your employer.  You can simply inform the custodian that the $500 was ineligible excess contributions to process the corrective distribution.  That will avoid the 6% excise tax for the excess contributions.

Here's an overview of how to handle (the relevant cites are at the bottom of the post if you need them)--

https://www.newfront.com/blog/correcting-excess-hsa-contributions

Corrective Distribution by Tax Filing Deadline

To avoid a 6% excise tax on the excess contributions, the employee must work directly with the HSA custodian to take a corrective distribution of the excess contributions, adjusted for earnings.  The earnings portion of the corrective distribution is included in the employee’s gross income, but there are no additional taxes.  In other words, neither the 6% excise tax nor the 20% additional tax for non-medical distributions will apply.

• Note: Where the excess contribution was made pre-tax through payroll and not reported as income on the Form W-2, the excess contribution itself must also be reported as “Other Income” on the individual tax return. Where the excess contribution was made outside of payroll, the individual cannot claim a deduction for the excess contribution amount.

The general rule is the employee must take the corrective distribution by the tax filing deadline (typically April 15), or the later deadline if filing for an extension (typically October 15), to avoid the 6% excise tax.  The corrective distribution is reported on Line 14b of the Form 8889 filed with the individual income tax return.  It is also reported as an excess contribution distribution (Code 2) in Box 3 of the Form 1099-SA provided by the HSA custodian.

There is a special rule outlined in the IRS Form 8889 Instructions providing individuals the opportunity to take a corrective distribution up to six months after the due date of the return, including extensions.  Under that special rule, employees can work with their personal tax advisor to file an amended return with the statement “Filed pursuant to section 301.9100-2” entered at the top.  This may also require additional changes to the Form 5329 to reflect that the corrective distribution will avoid the previously applicable 6% excise tax.

 

As to your employer being adamant that your spouse's general purpose health FSA is not disqualifying coverage for you, here's an easy cite you can provide them to confirm they are incorrect--

https://www.newfront.com/blog/hsa-interaction-health-fsa-2

IRS Notice 2005-86:

https://www.irs.gov/pub/irs-drop/n-05-86.pdf

Interaction Between HSAs and Health FSAs

Section 223(a) allows a deduction for contributions to an HSA for an “eligible individual” for any month during the taxable year. An “eligible individual” is defined in § 223(c)(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.”

In addition to coverage under an HDHP, § 223(c)(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223(c)(2)(C) also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer.

[mikestanley]

Thanks so much @Brian Gilmore. I really appreciate your thorough response and help. I'll reach out to the HSA custodian after the holidays and get this sorted out.

Next year, either I'll switch back to the PPO + FSA, or my wife and son will switch to the HDHP + HSA. It all comes down to math and timing for the rather large deductible and out of pocket maximum.

[mikestanley]

I hope you don’t mind me asking one quick follow-up question @Brian Gilmore. Even though my wife’s general purpose FSA has rendered me HSA inelligible, will it be OK if we use funds from her FSA to pay for my prescriptions, doctor visits, or other medical expenses? I’d like to assume so, and we’ve always used each others FSA cards throughout the year for each other depending on who ran out first. 

[Brian Gilmore]

Oh yeah, definitely use your spouse's FSA.  The FSA has blocked HSA eligibility for both of you, but you're still both eligible to reimburse any §213(d) expenses through the FSA. 

It's only a one-way street here on issues--HSA is a problem, but the FSA is all clear.  Might as well make the most of the FSA since you can't take advantage of the HSA.

[Jordan555]

This is a very great thread. I arrived here with many of the same questions. I am in a similar position, my spouse changed Jobs (new job started Sept 1, 2023) and got a FSA, meanwhile I was contributing my HSA. My question to the group, and hopefully @Brian Gilmore, is we discovered this rule in 2024, after the year ended and want to make it right. My gut is to take a corrective distribution from my HSA custodian for the amount of time that I was out of compliance in 2023 (4 months (Sept-DEC) and realize that income in 2024. 

• Is this the right way to handle this?
• Should the amount be (Total amount contributed /12 (months)) x 4 (for each month out of compliance) 
• Or since I did some uneven distributions the total of my contributions for the last 4 months?
• Or Something Else I am missing? 

Thanks soo much for the help and thanks for this wonderful thread. 

 

[Brian Gilmore]

Hi there, glad you found the thread helpful. 

Upon enrolling in the general purpose health FSA as of 9/1, you had disqualifying coverage that blocked your HSA eligibility.  So assuming you were HSA-eligible from January - August, you had eight months of HSA eligibility.

The HSA contribution limit is proportional when you are HSA-eligible for only a portion of the year (and that portion does not include December).  So your limit would be 8/12 (2/3) of the 2023 limit.

• More details: https://www.newfront.com/blog/the-hsa-proportional-contribution-limit

If you exceeded that proportional limit, you'll need to work with the HSA custodian to take a corrective distribution of the excess by 4/15 to avoid a 6% excise tax on those excess contributions.

• More details: https://www.newfront.com/blog/correcting-excess-hsa-contributions

Slide summary:

2024 Newfront Go All the Way with HSA Guide

[Graceice]

@Brian Gilmore This thread is helpful. I am in a more complicated situation. My family was enrolled in HDHP and contributed $3700 (including company contribution) to HSA Jan-Jun, then I changed job in July, and we enrolled in non HDHP and FSA ($1600), then I returned  to the first employer recently (end of Aug), and will be back on HDHP starting Sep 1. hsa custodian told me that I made mistake, I can not contribute to FSA and HSA within the same year, even with job change, my first employer should make ‘mistaken’distribution’ to withdraw contributions from HSA account through payroll, and I can not contribute to HSA for the remainder of the year. I looked at the FSA account and it does say, plan start date is Jan1 2024 and plan end date Dec31, eligiblility date is July1, last day for spending Aug7. Is it correct that I must withdraw HSA to 0 for this year? I consulted my CPA and she did not know if this is an issue and how to fix it. I appreciate it if you have any insights on this. Thanks.

[Brian Gilmore]

HSA eligibility is determined as of the first day of each calendar month.  So for the months of July and August you were not HSA eligible based on the FSA coverage in those months.  All that means is your prorated HSA limit is 10/12 of the statutory limit ($6,916 for family coverage), which can increase to the full limit if you take advantage of the last-month rule. 

So I disagree with the advice you received that all you HSA contributions were ineligible.  That advice would be appropriate only if you had the health FSA for the entire year.  Some vendor reps have only a rudimentary understanding of these rules.

[Graceice]

5 hours ago, Graceice said:

@Brian GilmoreThanks for the quick response. My non HDHP insurance plan ends by Aug 31, but FSA account shows that, FSA plan start date is Jan1 2024 and plan end date Dec31, eligiblility date is July1, last day for spending Aug7. FSA plan is not the same as health FSA you mentioned above, right? The FSA plan is for the entire year according to my FSA account statement? The other question is the FSA limit, is it 2/12 of the FSA family limit ( 2/12 of $3200)? Then my $1600 in FSA ran above the limit.

 

[Brian Gilmore]

The health FSA plan year is irrelevant for HSA eligibility purposes.  What's relevant is the period you could incur reimbursable expenses and submit them as claims to the health FSA.  That would be July and August.  

The FSA limit is however much you elected regardless of the amount contributed or months of coverage.  It operates very differently from the HSA rules.

[Graceice]

@Brian GilmoreSo technically, one family can contribute $3200 to FSA (July and August )and $6916 to HSA (10/12months)?

[Brian Gilmore]

That's true, but you won't have actually contributed $3,200 to a health FSA in a two-month span.  You'll have contributed a fraction of that, although you will have had the full $3,200 available.  You could have had the full $3,200 election amount available reimbursed without affecting your HSA eligibility for the other ten months.

[Annie]

@Brian Gilmore So glad I found this thread as we are approaching open enrollment for 2025. Speaking hypothetically, if my husband and I accidentally enroll in FSA and HSA through our separate plans, and we were not aware of the disqualification rule until we did 2025 taxes (spring 2026), but we used the HSA funds in 2025 (thus there would not be any funds left to do a corrective distribution of by tax time), would we just have to tell our accountant how much was contributed and used in the HSA and he manually adds that to our gross income when we file?

Thank you for your help

[Brian Gilmore]

Yes, that's a common mistake.  As noted previously in this thread, enrollment in a general purpose health FSA blocks HSA eligibility (i.e., the ability to make or receive HSA contributions) for both you and your spouse. 

The best approach in this hypothetical would simply be to prevent any HSA contributions from occurring in 2025 (both by notifying the spouse's employer of HSA ineligibility and revoking any employee HSA contribution election).  And if you somehow couldn't stop the contributions, you would want to avoid taking distributions (other than corrective distributions).

But to play along--if those HSA contributions were made, you would need to take a corrective distribution by the tax filing deadline (4/15/26) to avoid the 6% excise tax on those ineligible excess contributions.  The HSA custodian (bank) should have a process in place for how to handle a corrective distribution of funds already withdrawn from the account.  They might be able to simply convert the prior distributions as a corrective distribution.  Or they might treat those distributions under the mistaken distribution rules, which would require you first to return your HSA funds to the account and then process the corrective distribution.

More details:

• https://www.newfront.com/blog/correcting-mistaken-hsa-distributions
• https://www.newfront.com/blog/correcting-excess-hsa-contributions

[coolaks]

Hello Brian,

I have an HSA and my wife is planning to enroll into FSA. We have separate employers and separate insurances. Neither of us are covered under any part of other's insurance. Totally independent.

1. Will this make me ineligible for HSA even if we don't plan on using any FSA distributions for my expenses? We will strictly make sure FSA distributions are only used by my wife. 

2. Does my wife being in a PPO plan also makes me ineligible for HSA assuming she denies FSA? 

 

I find it weird that both husband and wife can have their own HSA (if on HDHP) and have their own FSA (if both on PPO) but one HSA and one FSA is not allowed.

"This is because an employee can reimburse pre-deductible expenses under the health FSA for both the employee and the spouse."

Employee can also reimburse pre-deductible expenses under the "HSA" for both employee and the spouse then how is it allowed for both employee and spouse to have HSA (assuming both are in HDHP plans in their respective employers) or even both FSA?  If the reasoning is as above, then no matter what only one HSA or one FSA per household should be allowed (except when it is a family plan). It is illogical that the rule applies only to one FSA and one HSA.

[Brian Gilmore]

1. Will this make me ineligible for HSA even if we don't plan on using any FSA distributions for my expenses? We will strictly make sure FSA distributions are only used by my wife.  This will make both of you HSA-ineligible.  It doesn't matter who actually uses the arrangement, what matters is you have the coverage in place.  HSA eligibility is blocked by any disqualifying coverage, which generally includes any pre-deductible health coverage for non-preventive medical expenses.  The health FSA is disqualifying for both your spouse and you because it enables both of you to incur reimbursable expenses pre-deductible.

2. Does my wife being in a PPO plan also makes me ineligible for HSA assuming she denies FSA?  HSA eligibility is determined on an individual by individual basis.  If your wife enrolls in a PPO, that will block her ability to make and receive HSA contributions in an HSA in her name.  It will have no effect on your HSA eligibility--assuming she does not enroll you as a dependent in the PPO.

I find it weird that both husband and wife can have their own HSA (if on HDHP) and have their own FSA (if both on PPO) but one HSA and one FSA is not allowed. That's not correct.  The PPO is disqualifying coverage that blocks HSA eligibility for anyone enrolled in the PPO.  What makes the health FSA different from the PPO is that the health FSA covers both spouses if just one is enrolled.

 

More details if interested--

IRS Notice 2005-86:

https://www.irs.gov/pub/irs-drop/n-05-86.pdf

Interaction Between HSAs and Health FSAs

Section 223(a) allows a deduction for contributions to an HSA for an “eligible individual” for any month during the taxable year. An “eligible individual” is defined in § 223(c)(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.”

In addition to coverage under an HDHP, § 223(c)(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223(c)(2)(C) also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer.

However, as described in Rev. Rul. 2004-45, 2004-1 C.B. 971, an individual who is otherwise eligible for an HSA may be covered under specific types of health FSAs and remain eligible to contribute to an HSA. One arrangement is a limited-purpose health FSA, which pays or reimburses expenses only for preventive care and “permitted coverage” (e.g., dental care and vision care). Another HSA-compatible arrangement is a post-deductible health FSA, which pays or reimburses preventive care and for other qualified medical expenses only if incurred after the minimum annual deductible for the HDHP under § 223(c)(2)(A) is satisfied. This means that qualified medical expenses incurred before the HDHP deductible is satisfied may not be reimbursed by a post-deductible HDHP even after the HDHP deductible had been satisfied. To summarize, an otherwise HSA eligible individual will remain eligible if covered under a limited-purpose health FSA or a post-deductible FSA, or a combination of both.

[BillF]

Hi Brian, I am 56 and switched our family’s health insurance plan to a HDHP with a HSA for 2025. The plan year is the calendar year. My wife has a general purpose FSA which ends in June 2025.  My understanding is that I am ineligible for six months, so I assume my max HSA contribution is 8550 plus the 1000 catch up contribution divided by two, which is 4775. In addition, I can only make reimbursements for qualified medical expenses from the HSA that occur on or after July 1, 2025. Am I able to contribute to the HSA throughout the entire calendar year in 2025 as long as my and my employer’s contributions are under 4775? Are there any other items I need to be concerned about? What happens if my wife’s FSA balance is not zero on June 30th and has a grace period to used the additional funds?  Thank you.

 

[Brian Gilmore]

Hi Bill, yes I agree with your assessment.  Lots of interesting issues teed up here.

As to when you can make the contributions up to that proportional limit--I interpret the rules to require that you wait until you are HSA-eligible.  When you lose HSA eligibility mid-year you can still contribute up to the proportional limit up to the tax filing deadline in the period following the loss of HSA eligibility, but I do not believe you can front-load HSA contributions (even when restricting up to the eventual proportional limit) prior to a period of HSA eligibility.  This point does matter because you cannot take tax-free medical distributions for expenses incurred prior to establishment of your HSA.  I've copied the relevant cites below for you to consider with your personal tax adviser if you want to press the issue.

• More details: https://www.newfront.com/blog/hsa-establishment-date

Keep in mind that you could still take advantage of the last-month rule to make the full 2025 contribution.  That would require you remain HSA-eligible through all of 2026.

• More details: https://www.newfront.com/blog/the-hsa-proportional-contribution-limit

As to the grace period, unfortunately this will block your HSA eligibility for an additional three months (July, August, September) unless you wife spends down the FSA balance to zero prior to the end of the plan year (6/30).  So I would definitely make that a priority.  Use sites that specialize in FSA expenses to spend it down timely if necessary.

• More details: https://www.newfront.com/blog/health-fsa-carryover-grace-period-affect-hsa-eligibility-2

Here's the relevant cites re when you can start funding in 2025--

IRS Notice 2004-2:

https://www.irs.gov/pub/irs-drop/n-04-2.pdf

Q-2. Who is eligible to establish an HSA?

A-2. An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not enrolled in Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person’s tax return.

…

Q-26. What are the “qualified medical expenses” that are eligible for tax-free distributions?

A-26. The term “qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under section 213.

IRS Notice 2008-59:

https://www.irs.gov/pub/irs-drop/n-08-59.pdf

Q-38. When is an HSA established?

A-38. An HSA is an exempt trust established through a written governing instrument under state law. Section 223(d)(1). State trust law determines when an HSA is established. Most state trust laws require that for a trust to exist, an asset must be held in trust; thus, most state trust laws require that a trust must be funded to be established. Whether the account beneficiary’s signature is required to establish the trust also depends on state law.

 

Slide summary:

2024 Newfront Go All the Way with HSA Guide

[Jw513]

Here's my question.  Previously my wife had a HSA that she contributed to.  I switched jobs so in 2025 I have an HSA.  She stopped contributing to her HSA for 2025 so we should be good from that standpoint.

Two questions.

1) Is her not contributing money to the HSA in 2025 enough?  Or is she not even allowed to have HSA account since I have an FSA?

2) For the money still sitting in her HSA that was contributed in previous years....can she USE that in 2025 for 2025 healthcare expenses?

 

 

[Brian Gilmore]

I assume you meant that you have a health FSA (not HSA) in 2025.

HSA eligibility is relevant only to the ability to make/receive HSA contributions.  It doesn't affect the ability to continue to have an HSA with a remaining balance.  It just means your spouse cannot contribute any further in 2025.

Furthermore, your spouse can still use that HSA (after losing HSA eligibility) to cover qualifying medical expenses tax-free.  Individuals do not have to maintain HSA eligibility to take tax-free distributions for medical expenses. 

[MXJQ]

A follow-up question on this thread, because we think we did the right thing, but want to ensure.

My husband started a new job in Jan, 2024 which offers two FSAs (the healthcare kind and dependent care), because I have a HDHP and we are using HSA for retirement purposes, we researched this when he was electing his benefits and he declined any contributions/use of the health FSA.  Made no contributions, didn't sign up for it, etc..

We, therefore, assume I am still eligible to contribute to my HSA.  I haven't yet, but want to make my 2024 contributions and ensure I am correct.  I carried our children on our plan, so assume I can use the entire max of $8300 for the year.  However, because of other insurance reasons, we took the kids off my plan when our coverage changed (so from Dec 1 on it was just me on my HDHP rather than me plus kids).

So, if I am reading some of the comments on this thread about monthly eligibility, should I therefore pro-rate and am I capped at 11/12 of $8300 plus 1/12 of $4150 for 2024 contributions? 

In retrospect, I am thinking the tax savings (plus investment savings) of being able to do the full max that I maybe should have kept my kids (or at least one) on my plan for 2025, but that's a different calculation for a different day. 

[Brian Gilmore]

Yes, that's correct.  The HSA contribution limits are calculated on a monthly basis.  This means you are able to contribute 1/12 of the employee-only limit for the months of the year in employee-only HDHP coverage, and 1/12 of the family limit for the months of the year in family HDHP coverage.  The overall annual contribution limit is the sum of those two prorated employee-only and family contribution numbers.

The IRS provides a useful chart to complete this calculation in the “Line 3 Limitation Chart and Worksheet” section of the Form 8889 Instructions:

https://www.irs.gov/pub/irs-pdf/i8889.pdf

[MXJQ]

Thank you! And am I also correct that because my husband declined any contributions to or funding of his health FSA I am totally fine to contribute to the HSA?

[Brian Gilmore]

Yes, assuming you met all other HSA eligibility requirements.  Mere eligibility for the health FSA (without enrollment) doesn't present any HSA eligibility issues.  It's only a problem (i.e., disqualifying coverage) when enrolled.

[MXJQ]

Great, thank you again!

[James_V]

Hi @Brian Gilmore. I have a somewhat similar question. My fiance has an FSA and I have an HSA. We are getting married on March 1 and are considering bringing her to my Healthcare plan, which includes the HSA. We just learned about the incompatibility of the FSA and HSA, so what should we do to stay compliant? Because marrying counts as a qualifying life event, is it okay if after getting married she ends her FSA contributions and switches to my plan (by March 31st)? Would this make us both eligible to have and contribute to the HSA? If so, what happens to the FSA? Does it immediately end or does she still have to make the monthly payments to cover the total credited at the beginning of 2024? Also, my fiance has already used ~50% of the funds in her FSA.

Thanks in advance for any advice.

James,

[Brian Gilmore]

Hi there, congrats.  Your finance will need to use the marriage event to drop the general purpose health FSA to preserve your HSA eligibility going forward after the marriage.  There will likely be a run-out period to submit claims incurred prior to dropping the health FSA.  The company can provide the details, but it's typically in the neighborhood of 90 days. If she switches to your HDHP, you'll be able to contribute the prorated family limit for the remainder of the year.

[James_V]

Thank you so much for the quick reply!

[adsing]

Hello,

I have a similar situation and I think I'm understanding, but want to double check.  I'm also not sure what to do about earnings.

My wife and I both had separate HSAs to start the year.  I contributed to mine Jan-Dec.  In September, she left her old job (so contributed to HSA Jan-Sept).  She started her new job in October and unfortunately signed up for an FSA.  This makes me ineligible for my HSA contributions for 3 months (Oct-Dec), correct?  Over the course of the year, I contributed $6898 to my HSA and she contributed only $690 to hers ($7588 total), with the family limit being $8300.   However, with the 3 months of being ineligible our limit would have been $6225.   Therefore we made excess contributions of $1363 that I need to remove from my HSA to avoid penalty.  Is that correct? 

My HSA made about $700 in earning during the year.  Do I need to remove all of that as well?   Or only 25% of it?

Appreciate the guidance

 

[Brian Gilmore]

Yes, IRS Publication 969 and the Form 8889 Instructions both state to include earnings in the corrective distribution.  Your HSA custodian should be able to calculate the earnings attributable to the excess.  

• More details: https://www.newfront.com/blog/correcting-excess-hsa-contributions

Here's the guidance--

IRS Publication 969:

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

You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
• You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

IRS Form 8889 Instructions:

https://www.irs.gov/pub/irs-pdf/i8889.pdf

However, you can withdraw some or all of your excess contributions for 2024 and they will be treated as if they had not been contributed if:

• You make the withdrawal by the due date, including extensions, of your 2024 tax return (but see the Note under Excess Employer Contributions, later);
• You do not claim a deduction for the amount of the withdrawn contributions; and
• You also withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

...

Include on line 14b any distributions you received in 2024 that qualified as a rollover contribution to another HSA. See Rollovers, earlier. Also include any excess contributions (and the earnings on those excess contributions) included on line 14a that were withdrawn by the due date, including extensions, of your return.

[LTG51]

Hi,

I'm going to be in a similar situation.  My wife currently has a PPO through her employer and an FSA.  I am covered through her PPO and also have an FSA through my employer.  Her new employer only offers an HDHP with HSA.  If I understand the regulations correctly, we are both still allowed to be covered by an HDHP, we just can't have an HSA until the end of the year, when my employer's benefit cycle ends?

More importantly, since I will still have my FSA (I know that her FSA from her old employer will only cover expenses incurred through her last day of employment), are we allowed to use my FSA to pay for expenses incurred while on the HDHP (ex. the deductibles, coinsurances, etc.)?

Also, I know that you mentioned it's sometimes possible to have your FSA revoked under Section 125 so that we can utilize an HSA.  I actually haven't spent any of mine yet this year, so I was curious if it's even worth exploring that option or if it's probably more trouble than it's worth.

[Brian Gilmore]

17 hours ago, LTG51 said:

If I understand the regulations correctly, we are both still allowed to be covered by an HDHP, we just can't have an HSA until the end of the year, when my employer's benefit cycle ends?

Yes, anyone can be in the HDHP--even if not HSA-eligible.  You just cannot make/receive HSA contributions for the period where you are not HSA-eligible.

 

17 hours ago, LTG51 said:

More importantly, since I will still have my FSA (I know that her FSA from her old employer will only cover expenses incurred through her last day of employment), are we allowed to use my FSA to pay for expenses incurred while on the HDHP (ex. the deductibles, coinsurances, etc.)?

Yes, perfectly fine to use the FSA for any cost-sharing expenses--even when covered by an HDHP.

 

17 hours ago, LTG51 said:

Also, I know that you mentioned it's sometimes possible to have your FSA revoked under Section 125 so that we can utilize an HSA.  I actually haven't spent any of mine yet this year, so I was curious if it's even worth exploring that option or if it's probably more trouble than it's worth.

The Section 125 cafeteria plan election for the health FSA is irrevocable for the duration of the plan year absent a permitted election change event.  Here's a quick overview of those events: 2025 Newfront Section 125 Permitted Election Change Event Chart

[Lidanaaaa]

Hi @Brian Gilmore I am in a very similar situation and I am so glad that I found this thread; so my plan year starts in June 1, 2025 to May 31, 2026 and I unfortunately signed up for the FAS while my husband has HAS and his plan year started in January 1, 2025. does this mean that he can still contributes up to 5/12*8550 for 2025 year and the entire 8550 for 2026 year if he takes the last month rule advantage? Additionally, we probably had similar situations back in 2023 or 2022 too. How do we find out if we had excess contributions in prior years? How do we know if there’s excess 6% tax taken from us for any tax year? Thanks so much! 

[Brian Gilmore]

Yes, I agree with that as the proportional HSA contribution limit for 2025 and the workaround to the proportional limit that would otherwise apply in 2026.

• More details: https://www.newfront.com/blog/the-hsa-contribution-rules-part-ii

You should probably consult with a personal tax adviser for how to address prior years.  Technically, the 6% excise for the excess/ineligible contributions accrues annually until you make a corrective distribution.

 

IRS Publication 969:

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

Excess contributions.

You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return.

Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.

[Lidanaaaa]

@Brian Gilmore thank you for your thorough response.