Tag Archives: HDHP

Can I Open an FSA While I Also Have an HSA?

Overview

Health Savings Accounts (HSA’s) and Flexible Spending Accounts (FSA’s) are both tools that help you lower your cost of medical care. There are pro’s and con’s to each, and while they work in the same manner of making health insurance purchases tax deductible, they function using different mechanisms. The HSA is more individual driven, while the FSA is an employer sponsored benefit; you can’t open an FSA without your employer’s help. Given the choice, this article compares both plans and can help you choose between an HSA and FSA.

However, the question often comes up as to whether you can have an HSA and an FSA at the same time? The short answer is “generally no” but there are some exceptions that we will dive into in this article.

HSA: No Other Health Coverage*

In order to qualify for an HSA, there are 4 hurdles you must pass, per IRS Form 969. Number 2 below is the most important here:

You are covered under a High Deductible Health Plan
You have no other health coverage except what is permitted under the “Other Health Coverage”
You are not enrolled in Medicare
You cannot be claimed as a dependent on someone else’s tax return

The IRS clearly calls out #2 in relation to Flexible Spending Accounts when it says:

Other employee health plans. 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.

So they are saying “No”, that a Flexible Spending Account is considered other health coverage and would violate rule #2 above, but the key word they use is “generally”. If you read on in Form 969 you will find some exceptions and types of FSA plans that you can open while you have an HSA.

FSA’s allowed with HSA’s

So the run of the mill FSA your employer probably offers you is not compatible with and HSA. Surprisingly, if you read on far enough in Form 969 you will find a short list of FSA plans that can be opened at the same time as HSA’s.

However, an employee can make contributions to an HSA while covered under an HDHP and one or more of
the following arrangements:

Limited-purpose health FSA

Post Deductible Health FSA

So it is true, the magic secret backdoor of having an HSA and FSA at the same time has been revealed by the IRS! It is just that the FSA has to be a certain type of plan. This is a great benefit because the combination of an HSA and limited FSA allows you even more tax free medical spending. For example, if you have an HSA and limited purpose FSA, you could max out your HSA contribution and still put other money aside in the limited purpose FSA. Of course, you will want to use that limited purpose FSA funds up during the year because unlike and HSA, FSA funds are use it or lose it. However, this protects your HSA contributions and allows the to compound and grow. Even better if you are getting employer contributions for either plan.

Limited-Purpose FSA

A limited-purpose FSA is a special type of Flexible Spending Account that only allows you to spend it on certain types of qualified medical expenses. It behaves much like a regular FSA but specifically limits your spending to qualified dental and vision expenses for you, your spouse and your dependents. Thus, it seems to exclude actual medical care. However, the benefit is you can contribute both to a limited purpose FSA and HSA at the same time. It makes sense if you plan on having vision or dental work performed in the year, as this limited purpose FSA (LPFSA) could be a great option to save money. You would make the contribution to the LPFSA and when those vision / dental expenses came up, use the LPFSA funds before you touch your HSA. Of course, you can’t reimburse the same expense from the LPFSA and HSA (called “Double-dipping”) but the increase in tax free medical spending is great.

Post Deductible FSA

You can also open a Post Deductible FSA at the same time as you have an HSA. This is an uncommon FSA but it basically allows you to use FSA dollars once that year’s HSA minimum deductible is hit. So if your plan’s deductible is higher than the HSA minimum, this type of FSA would kick in after you pay the amount equal to the HSA minimum deductible for a given year. This would help alleviate some pressure if you are already spending up to the HSA minimum deductible on your plan, as your plan’s deductible may be much higher. Ideally, this FSA would be employer contributions because the risk of loss (i.e. not using your post-deductible FSA) would be high as not everyone hits that amount of deductible spending every year.

Allowable Health Reimbursement Accounts (HRA’s)

In addition to including a few forms of FSA, the government allows a few types of Health Reimbursement Accounts to be used at the same time as an HSA. These are spelled out in Form 969 and include the following:

Limited purpose HRA
Suspended HRA
Post Deductible HRA
Retirement HRA

In summary, there are additional FSA and HRA options to help reduce your medical care, even if you have and are contributing to a Health Savings Account. Do proper research to make sure you stay on the good side of the IRS when it comes to these plans.

Note: if you need help with your HSA tax forms, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

Out of Pocket Maximum Too High For HSA?

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

Is it possible for maximum out of pocket expenses to be too high to qualify for a Health Savings Account? Mine is $6800. My deductible is the same. This is for a single person.

Yes, it is possible for an insurance plan not to qualify as an HDHP due to to an out of pocket max being too high.

An insurance plan must be considered a High Deductible Health Plan (HDHP) to be HSA eligible. Each year, the IRS publishes their HDHP definitions of what qualifies. The requirements are pretty consistent although amounts vary from year to year due to inflation calculations. You must meet all of the requirements to be HSA eligible, and they traditionally look at the following:

Minimum Deductible – your plan’s deductible must be greater than this amount
Out of Pocket Max – your plan’s out of pocket maximum (the total amount you can spend in 1 year on your plan) must be less than this amount

Once you compare your health insurance to these numbers for a given year, you determine if your insurance is categorized as an HDHP, and if so you are able to open and contribute to a Health Savings Account.

For 2017, that out of pocket maximum is $6,550, so if your plan has an out of pocket max of $6800, it likely does not qualify. I don’t know why the government does this and excludes certain plans. In my mind, they have not adequately adjusted the HDHP definitions in line with out of control insurance costs. In addition, plans offered on the “marketplace” by the Affordable Care Act systematically priced plans out of HSA eligibility using your exact example, setting out of pocket maximums just above the HDHP definition. Hopefully the government rights the ship and opens up HSA’s to more people.

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Note: The IRS requires that you keep receipts for your Health Savings Account purchases. Please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.

What is an Eligible Individual for an HSA?

Qualifying for an HSA

The IRS defines eligibility for contributing to a Health Savings Account. They group these requirements into the term “eligible individual”, and if one is an eligible individual, than they can open and contribute to a Health Savings Account. However, some of the requirements of an eligible individual change from year to year, specifically the definition of a High Deductible Health Plan (HDHP). It is important to know if you are an eligible individual because it determines your contribution limit for that month, and hence, the year. You need to proactively monitor changes in these definitions, especially if your health care coverage changes. Making contributions when you are not an eligible individual can lead to penalties via excess contributions.

HSA eligibility determined monthly

Your status as an eligible individual is determined by the IRS at the beginning of each month. They do not do this for you, but instead rely on you to know the rules and proceed as appropriate. Doing this incorrectly can cost you money, either through excess contributions or not contributing enough.

Practically, this means that throughout the year, on the first day of the month you need to test against the 4 requirements of an eligible individual. This is easier than it sounds: if you were an eligible individual the month prior, and nothing changed regarding your insurance, you are likely an eligible individual the next month. The one exception here is at the beginning of the year as HDHP definitions can change, causing your plan to no longer fit the definitions for an HSA.

The requirements for being an eligible individual are a package deal. If you do not meet any one of them, you are not an eligible individual, so you can’t contribute to an HSA that month. On the other hand, if you are an eligible individual at the beginning of the month, that eligibility lasts for the entire month. This means is you can contribute to your HSA for that month i.e. 1/12 of your contribution limit.

Your status as an eligible individual may change throughout the year. Since you are “tested” each month on the 1st, the result may come back differently. You may be an eligible individual for January – June, ineligible for July – November, and eligible in December again. This would effect the calculation for your contribution limit for the year. You can also look back over the year and determine if you were an eligible individual for each month, generally by looking at the insurance you had on the 1st.

What follows is a discussion of the 4 requirements that define an eligible individual for an HSA. All of this can be found in IRS Publication 969.

1) Covered by HDHP

This is the big one that makes or breaks it for most people. Your health insurance must meet certain criteria to be considered a High Deductible Health Plan. If it does, you have met 1 of the requirements for being an eligible individual. If it does not, you are not allowed to contribute to an HSA during that time.

You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month.

For both self-only and family coverage, the IRS sets minimum deductibles and maximum out-of-pocket amounts. Your plan must have a higher deductible and lower maximum out of pocket amount to be considered an HDHP. You can find contribution limits and HDHP definitions on the sidebar of this post.

These are generally straightforward but you need to be careful when you change coverage or the year turns over. These amounts change from year to year, and unfortunately, what is an HDHP one year may not be one the next.

2) No Other Health Coverage

You cannot have other health insurance and be considered an eligible individual. For example, you cannot be on both an HDHP and a spouse’s plan at the same time. Of course you can do this if you want, but you will not be able to contribute to an HSA.

You have no other health coverage except what is permitted under “Other Health Coverage”, later.

The exceptions that the IRS lists under “Other Health Coverage” include limited purpose FSA or HSA (not regular FSA’s that you are thinking of), Suspended HRA’s, post deductible FSA and HRA, and retirement HRA’s.

3) You are not enrolled in Medicare.

This one seems pretty straightforward: if you are enrolled in Medicare, you are not eligible for contributing to an HSA for that month. Most people stay on Medicare once they join it, so at that point they are done contributing to their HSA. Of course, you still get to enjoy your existing HSA contributions, and once you are 65, you can enjoy them for non-medical expenses. A nice boost to retirement, if you will.

However, the risk you run with Medicare is that it retroactively applies coverage in a weird way. If you apply for Medicare after you turn 65, its coverage retroactively applies up to the 6 months prior. The result is you are disqualified as an eligible individual for those months, and you risk excess contributions for that time.

4) You are not a dependent

This one is pretty straightforward, you cannot be a dependent on someone else’s tax return and contribute to your own HSA.

You cannot be claimed as a dependent on someone else’s tax return.

However, if you are not a dependent but still on a parent’s plan, you can still contribute to an HSA. This is common for adult children on a parent’s HSA plan – and they can contribute the family limit in their own account!

Eligible Individual using the Last Month Rule

The one override for being an eligible individual is the Last Month Rule, which can grant eligible individual status to months prior to you being insured. It is often uses when you begin HSA eligible insurance, but if you have HDHP eligible coverage on December 1st, it allows you to be an eligible individual for up to the full year.

Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).

This has the effect of allowing you to contribute the full contribution limit, even if you didn’t have HSA insurance for the full year. However, there is a catch, and it is you must maintain that coverage for the following 12 months by means of the Testing Period. If you don’t, you can owe taxes and penalties on the amount you “over” contributed. You do not need to use the Last Month Rule, and instead can play it safe by contributing the percentage of the contribution limit for months you were covered.

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Note: if you need help determining your HSA contribution limit based on being an eligible individual or not, please consider using my service EasyForm8889.com to complete Form 8889. It asks simple questions to determine this for you, no matter how complicated your HSA situation.