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*
- 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.
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.