Tag Archives: Flexible Spending Account (FSA)

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.

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.

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.

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Tag Archives: Flexible Spending Account (FSA)

HSA Contribution with FSA Carryover / Grace Period

Overview

Carryover and Grace Period defined

HSA with FSA Grace Period

HSA with FSA carryover

FSA / HSA contribution examples

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

Overview

HSA: No Other Health Coverage*

FSA’s allowed with HSA’s

Limited-Purpose FSA

Post Deductible FSA

Allowable Health Reimbursement Accounts (HRA’s)

What is an Eligible Individual for an HSA?

Qualifying for an HSA

HSA eligibility determined monthly

1) Covered by HDHP

2) No Other Health Coverage

3) You are not enrolled in Medicare.

4) You are not a dependent

Eligible Individual using the Last Month Rule