Standard Health Care Flexible Spending Accounts (HCFSAs) which may reimburse medical expenses are disqualifying coverage for both an individual as well as their spouse for purposes of the tax benefits of a health savings account (HSA). Employees wishing to open and contribute to an HSA (or have employer contributions into their HSA) would not be eligible if their spouse has a HCFSA (unless the FSA is a limited purpose HCFSA with reimbursements restricted to dental and vision expenses).
In order to be eligible to make or receive contributions to an HSA, a participant must (1) be enrolled in a HSA qualified HDHP, (2) not be another individual’s tax dependent, (3) not be entitled to (or enrolled in) Medicare, and (4) not be covered by any disqualifying coverage. In addition, eligibility to make HSA contributions is based on the status of the individual as of the 1st day of the month. If a participant makes or receives HSA contributions above what is permitted due to their eligibility, they will be subject to income tax and a 6% excise tax on the excess contribution.
Because standard HCFSAs may reimburse participants for general medical expenses, they are classified as disqualifying coverage. If a participant is enrolled in the HSA compatible limited-purpose HCFSA, it would not be classified as disqualifying coverage, because reimbursement is restricted to dental and vision expenses.
It is important to keep in mind that participation in the standard HCFSA is disqualifying coverage for the entire plan year, regardless of when the participant exhausts their HCFSA balance.
Impact of a Spouse with a Standard Health Care FSA:
A spouse’s health care FSA functions the same was as if an employee had the account themselves. All Health Care FSAs can be used for either the participant, their spouse, or their eligible dependents, which includes adult children through the end of the tax year if they are 26. Because a standard HCFSA can always be used for a spouse’s or dependents expense, this makes an FSA in either spouse’s name HSA disqualifying coverage for both individuals and their dependents within a marriage.
As stated above, a limited health care FSA, which is only for limited purpose expenses (dental and vision) does not interfere with either person’s ability to open and fund an HSA.
In cases where the spouse’s health care FSA is exhausted, and in cases where the spouse’s health care FSA will be used exclusively by the spouse – these FSAs remain disqualifying coverage for the employee because the possibility of reimbursement for the spouse and dependents exists by plan definition.
A spouse’s standard Health Care FSA can cause problems for an employee at the time where their employer begins to offer an HSA qualified high deductible health plan (HDHP) with or without employer contributions to the HSA. This can be complicated more when a spouse’s plan through their employer runs on a different plan year.
ABC Company offers benefits on a calendar year basis. Effective January 1, 2020, they will begin offering an HSA qualified HDHP and will make HSA contributions to those who are eligible and establish an HSA. Employee John is interested in the HSA, his wife Mary is also employed. Her employer’s plan runs on a July – June plan year. Mary is currently enrolled in a standard health care FSA through her employer.
- Can John begin contributing to the new HSA offered by his employer on January 1st?
- NO! Because he is eligible to receive health care benefits under Mary’s FSA, John cannot contribute (or receive employer contributions) to an HSA until he is no longer covered by a standard HCFSA.
- What if John and Mary exhaust Mary’s FSA balance prior to January 1st?
- Unfortunately this still does not permit John to contribute to an HSA. The coverage under the FSA applies to the entire plan year in which you had coverage, not just the duration of when funds are available.
- Can Mary terminate her FSA as of January 1st?
- Unfortunately no. The open enrollment of one spouse does not allow for the other spouse to change their FSA benefit mid-year. This is not a permitted election change event.
- Can Mary convert her standard HCFSA to a limited purpose HCFSA as of January 1st?
- The regulations are very unclear and additional guidance from the IRS would be appreciated. Based on the change of election rules, there is nothing that expressly permits this at the participant level. Please check with your administrator for their interpretation of the regulations.
- What is the earliest John can begin contributing to an HSA?
- The earliest John would be eligible to contribute to an HSA (assuming he meets all other requirements to be HSA eligible and has no other disqualifying coverage) would be July 1, 2020. However, if Mary’s standard health care FSA has either the grace period or rollover provisions AND if her account balance is not exhausted as of the end of her plan year (June 30, 2020) – this will delay when John can begin making contributions.
Please review our other recent articles on other benefits that have an impact on HSA eligibility.
Medicare Enrollment's Impact on HSA Eligibility
Health Care FSA Grace Period's Impact on HSA Eligibility
Health Care FSA Rollover's Impact on HSA Eligibility