Author Archives: Evan

HSA Contribution with FSA Carryover / Grace Period

Overview

We have established that you cannot contribute to an HSA if you or your spouse has a Flexible Spending Account (FSA). This is because FSA coverage is considered “other health coverage” which prevents one from being HSA eligible. Since FSA benefits extend to the holder as well as their spouse and dependents, this can disqualify some otherwise ready people from contributing to HSA’s. Per IRS form 969:

An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally can’t make contributions to an HSA

The exceptions to the above quote include limited purpose health FSA or HRA, Suspended HRA, post-deductible FSA or HRA, and retirement HRA.

Carryover and Grace Period defined

Generally, FSA’s are “use it or lose it” type plans where any unused funds disappear at the end of the year. This contrasts sharply with HSA’s where the funds are yours forever. To cushion this blow, the IRS allows for two FSA options available to the plan administrator. Generally only one of the following can be chosen per FSA:

Grace Period – for 2.5 months following the end of the plan year, you can use prior year funds to pay for qualified medical expenses. This effectively extends the “lose it” deadline. That means up until March 15th you can still use your prior year FSA funds.
Carryover – your plan may allow up to $500 to be brought forward into the current year to spend on qualified medical expenses. You then have access to this money for the entire year. Any amount above this is forfeit. In other words, you can maintain $500 in your FSA indefinitely.

Can I contribute to my HSA if I carryover FSA funds?

These provisions effectively extend the life of your current year FSA funds. However, a fairly common scenario is ending FSA coverage with a carryover / grace period and beginning HSA eligible coverage. What happens when the FSA carryover interferes with HSA coverage? Are these people HSA eligible, and can they contribute?

HSA with FSA Grace Period

Surprisingly, the IRS provides explicit guidance to the carryover or grace period provision that many FSA’s contain. In IRS form 969 they state:

Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero.

This is great because it allows an exception to the “no other coverage” clause of HSA eligibility. As long as you zero out your FSA by December 31st, you nullify the carryover or grace period impact and can contribute to your HSA per normal. This provides relief for those whose FSA coverage is ending and HSA coverage is beginning. Of course, if your FSA policy ends and you no longer have access to it, there is no effect on your HSA contribution.

HSA with FSA carryover

The IRS does not call out the FSA carryover provision and how it affects HSA contributions. I believe this is implicit since a carryover constitutes a continued access to FSA funds. If you have FSA funds available, you are not HSA eligible. However, if your FSA coverage ends and wipes out any carryover funds, you would then be HSA eligible, assuming all other conditions are met.

FSA / HSA contribution examples

Here are some common scenarios you might encounter with an FSA carryover or grace period and the effect on HSA contributions. Each scenario assumes you have an FSA in the current year and are switching to an HSA eligible plan in the new year:

FSA has carryover but no balance on Dec 31st – since you depleted your FSA by year end, you can contribute to your HSA for each month in the following year.
FSA has grace period of 2.5 months with balance on Dec 31st – since your FSA has a balance on January 1st, you are not HSA eligible until April 1st. This assumes the FSA coverage goes away and additional FSA funds are not made available.
You carryover $500 in your FSA into subsequent year – you cannot contribute to your HSA while covered by an FSA. As long as your FSA coverage continues and funds remain in your account, you cannot contribute to the HSA. Since the carryover period technically lasts all year, in theory this could make you HSA ineligible for the year.

The bottom line: use up any of your FSA funds by December 31st if you wish to be HSA eligible on January 1st.

Note: to fulfill the IRS requirement of tracking HSA receipts, please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.

How Family Plans with Individual Deductibles Affect HSA’s

This question was submitted by an HSA Edge reader Mordechai. Feel free to send in your question today to evan@hsaedge.com.

My family insurance plan (parents and children), besides having a total deductible and out of pocket max for the entire plan, has a separate deductible and OOP max for each individual on the plan. Do these numbers effect my eligibility for an HSA?

Family vs. Individual Deductibles

A deductible is an amount you pay out of pocket before insurance begins paying. Most family coverage HSA plans feature an aggregate (“non-embedded”) deductible with one deductible amount for the entire family. Each individual’s medical spending counts toward that deductible, and once met, insurance coverage begins. The only thing that matters is whether the deductible is met, not who spent what towards it. This means that one person can incur enough cost to trigger the deductible, or it can be a shared effort. Either way, it is irrelevant since there is one deductible and it is shared.

Some HSA eligible HDHP insurance plans include individual deductibles in addition to the family deductibles. These plans are quoted as “deductible of $4,000, individual deductible of $2,800”. Each individual’s expenses count towards their individual deductible as well as the family deductible. Once they have met their individual deductible for the year, insurance begins paying expenses for that individual. Once the family deductible is met for the year, insurance begins paying for the entire family.

The benefit of an individual deductible is they are lower than family deductibles, so you can receive full cost coverage sooner. The downside is that coverage only applies to one person until the family deductible is met. In addition, it is another deductible to manage for each person insured.

How Individual Deductibles Work with Health Savings Accounts

When evaluating HDHP plans for HSA eligibility, it is important to keep in mind how individual deductibles come into play. The IRS states that for a plan to be HSA eligible, both the family and individual deductible must be above the minimum annual deductible for HDHPs. If not, the plan is not considered a HDHP and is not HSA eligible. Per IRS form 969:

HSA-rules-individual-deductible

Said another way, if any of the individual deductibles are lower than the HDHP minimum deductible ($2,700 in 2018) the entire plan is not HSA eligible. This is true even if the plan’s “total” or family deductible is above the HDHP minimum. I don’t really like this rule as it is a grey area and confusing to users. That said, I understand its use since parts of the plan have a lower deductible than that required for HSA’s. The problem I have is this may not be apparent when choosing coverage, leading to a situation where someone plans and saves in their HSA, only to find they are not allowed to contribute.

HSA Contribution If Changing Coverage Next Year

This question was submitted by an HSA Edge reader. Feel free to send in your question today to evan@hsaedge.com.

My current insurance plan is HSA compatible, which I’ve had since January 1st, 2017. On January 1st of 2018 I am changing to a plan that is not HSA compatible. If I contribute this year and not in 2018, will I be penalized on the money contributed in 2017?

People are often concerned about over contributing to their HSA, likely on account of how easy it is to use (and abuse) the Last Month Rule. Its use allows you contribute more to your HSA in the current year, but binds you to the Testing Period, which requires you to maintain additional coverage into the following year. If you fail to do that, taxes and penalties await you.

The point to remember is you can never be penalized for contributing for months where you actually had coverage (see: Not Using the Last Month Rule when Coverage Changes). So in your case, you had coverage for 12 months in 2017 and are allowed to contribute for 12 months in 2017, which is 100% of the HSA contribution limit. In fact, the Last Month Rule doesn’t apply to you since you had coverage all year – you can’t possibly contribute more. But consider the scenario where you had coverage for only 7 months, say from June – December. You would have “earned” those 7 months and could contribute 7/12 of the contribution limit for the year without risk. However, you would also have the option to use the Last Month Rule and contribute the full year contribution limit, effectively contributing for those 5 months you weren’t covered.

This then puts you at risk since you are using the Last Month Rule to contribute more than you otherwise could have. This is allowed, and often a good idea, but if you fail to continue HSA coverage for the following 12 months (through next December), you will fail the Testing Period. This is where extra taxes and penalties come to bite you. In the prior example, those 5 months you didn’t have coverage would be added back to income (so they are taxed), plus a 10% penalty would be applied.

So using the Last Month Rule has a risk, but know that you can always play it safe and only contribute for the actual months you had coverage. If you know you are losing HSA coverage due to insurance/job/Medicare changes, do not use the Last Month Rule.

Note: if you need help with Last Month Rule calculations, or just need to file your Form 8889, please consider using my service EasyForm8889.com. It asks simple questions in a straightforward way and will generate your completed HSA tax forms in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.