Spouse has Individual coverage and FSA through her employer. I have individual and HSA through mine. Bank of America says that is fine?!?

I started a new job in 2023.  I have never had an HSA before and that was all that my employer offered.  My wife has always had an FSA.  Later in 2023, I realized there was an issue with me having HSA and her FSA.  I spoke with the custodian (Bank of America) and they keep telling me that since we are on individual plans, then our current arrangement is not an issue.  However, everything I see says that her FSA is allowed to be used for a spouse even if they are not on the health care plan.  This, by default, means I am not allowed to have an HSA.  Is Bank of America just not understanding the situation?  I would think they should know, but I am nervous to leave things as is if that means I am stuck with a penalty at tax time.

Thanks for any feedback!

The spouse's general purpose health FSA was unfortunately disqualifying coverage for both the spouse and you.  I've copied the relevant cite below for reference.

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

So you will need to have the HSA custodian process the corrective distribution.  That will avoid a 6% excise tax that would otherwise apply for the excess contributions.  You should just be able to tell the custodian you had disqualifying coverage without the need to argue over the finer points of the HSA eligibility rules here.

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

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.

Slide summary:

2024 Newfront Go All the Way with HSA Guide

Thank you for the detailed response.  

One other question...  If I return the money I used from the HSA in 2023 and remove the balance from the account, all before April 15th 2024, will I need to have a corrected 1099-SA for tax year 2023.  BOA keeps saying that I will not receive a corrected form, but will see the transactions listed on the 1099 I receive from them in 2025.

This seems incorrect to me as I will have to file taxes with a 1099 saying I withdrew regular distribution from my HSA. Seems like one of the purposes of a corrected form is the situation that I have found myself in.

Please advise...

I'm not following why you think the 2023 1099 should show the distribution.  You aren't taking the corrective distribution until 2024.  So the '24 1099-SA should show the corrective distribution code in Box 3 with Code 2 I believe.

So the HSA was opened in 2023.  I thought I had until April 15th of 2025 to make the corrections and pull the funds out so that I do not have to pay the excise tax.

How do I file my 2023 taxes with a 1099 that says I used HSA funds, but I am not eligible to have an HSA?

You have until 4/15/24 (not 2025) to process the corrective distribution and thereby avoid the 6% excise tax for the 2023 excess contributions.

Are you saying you took distributions of those funds already?  In that case you could try to have them returned as a mistaken distribution.

• Here's a full overview: https://www.newfront.com/blog/correcting-mistaken-hsa-distributions