Tag Archives: HSA Eligible

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.

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.