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