Advantages of Stacking Limited Health FSA with HSAs

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Some may think that enrolling in a Health Savings Account (HSA) means that you no longer can or need to participate in Health Care flexible spending accounts (FSA) and that is not necessarily true in all circumstances.

What type of Health Care FSA is HSA compatible?

It is true that you cannot be enrolled in a standard health FSA at the same time you are enjoying the tax benefits of the HSA because it is considered disqualifying coverage. However, individuals can maintain HSA eligibility while enrolled in a limited health FSA because the reimbursements are restricted to dental and vision expenses.

Did you know that an employee can actually increase their tax savings if they learn to use a combination of HSA and limited health FSA?

Employees that are enrolled in both can contribute the maximum to the HSA and contribute up to the maximum to the limited health FSA for predictable dental and vision expenses. There is a greater tax advantage when an employee has a need and can enroll in both.

Do you need to exhaust all of the HSA dollars first before you can use the limited health FSA dollars?

No. There is no rule that requires the HSA dollars be used first before limited health FSA dollars.

What are the top 5 reasons an employee would want to contribute to both the HSA and limited health FSA if the HSA can also be used for dental and vision expenses?

  1. Employees may want to use the HSA as a savings account for future medical expenses if they don’t have current medical expenses and use the limited health FSA for current predictable dental and vision expenses.

  2. Employees that can accumulate a substantial HSA balance may have investment options available through the HSA custodian that they would not have if they drain their HSA each year and the limited health FSA provides and opportunity for tax savings on predictable dental and vision expenses.

  3. Employees may use the maximum HSA contributions for the year for current medical expenses and would not have any balance remaining for current dental and vision expenses.

  4. Employees may want to expand their tax savings when they enroll in both HSA and limited health FSA.

    • For a single plan in 2018, that can provide $3,450 in an HSA tax free and up to $2,650 in limited health FSA tax free for predictable dental and vision expenses. That provides up to $6,100 tax free for 2018 for someone with single coverage

    • For a family plan in 2018, that can provide $6,900 in an HSA tax free and up to $2,650 in limited health FSA tax free for predictable dental and vision expenses. That provides up to $9,550 tax free for 2018 for someone with family coverage

    • The savings in 2019 will increase with the inflationary adjustments to the annual contribution and annual election limits.

  5. Employees still like the FSA experience because of the uniform coverage rule that permits the reimbursement up to the maximum annual election regardless of their balance at the time of the claim. This rule permits an advance to participants based upon their annual election, from future payroll deductions interest free, which might make some expenses more affordable compared with HSAs that must be funded to use the account to pay for expenses.

Let’s look at an example of how HSA and limited health FSA stacking would work.

Jill is enrolled in a single high deductible health plan with a $3,000 deductible that is HSA compatible for the calendar year 2018.

  • Jill takes allergy and asthma medication regularly and has $500 per month in RX prescription drug expenses.

  • Jill plans to fund the HSA to the maximum and will deposit $3,450 over the course of 2018.

  • After 6 months of RX costs, Jill has incurred $3,000 in expenses and will have met her deductible under the health plan. Jill will be able to use the HSA dollars to help her pay for her RX expenses tax free.

    • Keep in mind that the you cannot take a distribution from the HSA until the HSA has been funded, which may mean that Jill either needs to accelerate the funding of the HSA to deposit the dollars earlier in the year to keep pace with her expenses, or she may be paying for her expenses through an alternate means and then later reimbursing herself as deposits are made to the HSA periodically through payroll.

  • Jill also knows that she needs to replace her prescription eyeglasses and sunglasses in 2018 and predicts her expense will be $1,600 and elects to set aside money in a limited health FSA for her predictable vision expenses. Jill can buy her glasses at anytime in 2018 and be reimbursed the full $1,600 regardless of her FSA balance at the time of the claim.

  • The majority of Jill’s HSA dollars are used to pay for her RX expenses in 2018. It is true Jill still has some HSA dollars available after the $3,000 deductible is met for RX expense and those dollars can be used for the vision expenses; however, the remaining balance is not sufficient to pay for the entire vision expense in 2018. Jill can rollover any remaining HSA dollars to the next year for future expenses.

By using a combination of the HSA and limited health FSA, Jill was able to increase her tax advantage by $1,600 by using both tax advantaged accounts.

As you can see there are lots of advantages to using a combination of HSA and limited health FSA!


Categories: Benefits in General, Compliance, Health Care in General | Tags: Limited Health Care FSA , HSA , Health Savings Accounts , FSA | Return