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Health FSAs: Impact on HSA Eligibility…Continued

 October 24 2019     Diane Cross

This article is co-authored by Cassidy Zang and Diane Cross

When discussing Health Savings Account (HSA) eligibility, a common topic that bubbles is how Health Flexible Spending Account (FSA) coverage can impact it. As discussed in our previous blog post, FSA plan design (e.g., grace period or carryover) can impact HSA eligibility into the subsequent plan year. Continuing the discussion on the topic, this post highlights when spousal coverage and different coverage periods affect HSA eligibility. 

Background
The IRS provides that to be eligible* for an HSA you must not have any disqualifying coverage. Generally, disqualifying coverage includes “first-dollar coverage” – providing benefits (other than preventative care) prior to the HDHP’s minimum deductible being met. Notably, disqualifying coverage includes FSAs (with some exceptions as explained in our previous blog post).

Coverage through Another’s FSA (e.g. Spouse/Parent)
A general-purpose FSA is considered disqualifying coverage whether the individual is the participant or is only someone whose expenses can be reimbursed under the FSA. So, what does this mean? An individual’s FSA coverage through a spouse’s plan could make that individual ineligible for an HSA. Important to note, it is the ability to have claims reimbursed under the general-purpose FSA that makes an individual ineligible for an HSA. It does not matter if the individual is enrolled as an employee at their employer – or as a spouse (or dependent) on another employer’s plan. For example: 

Jeff and Stacey are married and enrolled in coverage through their respective employers. Stacey is enrolled in an HDHP while Jeff is enrolled in a non-HDHP and general-purpose FSA. Because of Jeff’s FSA coverage, Stacey is not HSA-eligible. This is because the IRS permits spouse’s expenses to be paid for under the FSA as a qualified medical expense. This disqualifies Stacey, even if Jeff doesn’t actually spend any of the FSA money on her. If Jeff’s FSA coverage excludes coverage for spouses (although uncommon, can occur), or if Jeff was enrolled in a limited-purpose or post-deductible FSA rather than a general-purpose FSA, then Stacey would be HSA-eligible.

Coverage through another's FSA can also apply to dependents. For example, adult children who have HDHP coverage are HSA ineligible if they are also covered by another’s general-purpose FSA, despite the fact that they would otherwise be eligible to contribute.

Josh is 24 and employed full time. Josh is enrolled in his employer’s HDHP and has no disqualifying coverage in his name. Barbara, Josh’s mother, is enrolled in her employer’s non-HDHP with general-purpose FSA coverage. If Barbara’s FSA coverage includes dependents, Josh is HSA-ineligible (whether or not any FSA dollars are actually used on him).

Different Coverage Periods
It is common for FSA plan years to run on the calendar year while medical coverage renews mid-year (e.g. July 1). In this instance, it is important for employers to keep in mind that HSA eligibility is impacted for the entire period of FSA coverage. For example: 

Sharon’s FSA renewed on January 1st, but her medical coverage renews on July 1st. Sharon is unable to disenroll from her FSA in favor of an HSA mid-year. If she is looking to switch to an HDHP with HSA, she must maintain her FSA enrollment until the end of her FSA plan year, December 31st. She can enroll in a qualified HDHP in July to take advantage of the lower premiums, but she is unable to open and contribute to the HSA before January 1st of the following year (assuming the FSA does not have a grace period or carryover provision). Sharon can keep spending her FSA dollars on qualified expenses until December 31st as she is not yet enrolled in the HSA.

It is important for employers to understand the “whole picture” of how FSAs impact HSA eligibility, especially for those who offer both. Equally important is communicating these nuances during open enrollment. Individuals who contribute to an HSA but are ineligible can face an excise tax of 6% for each taxable year applicable if not corrected timely. (While most of the responsibility for HSA eligibility is that of the individual account-holder, there can be employer liability in the instance where an employer makes HSA contributions with knowledge of disqualifying coverage that makes the employee ineligible.)

For additional information, please contact your HORAN representative with any questions.

*Other requirements for HSA eligibility include: being enrolled in a qualified High Deductible Health Plan, and not being enrolled in Medicare or an eligible tax dependent of someone else.