Standard Health Care Flexible Spending Accounts (HCFSAs) which may reimburse medical expenses are disqualifying coverage for both an individual as well as their spouse for purposes of the tax benefits of a health savings account (HSA). Employees wishing to open and contribute to an HSA (or have employer contributions into their HSA) would not be eligible if their spouse has a HCFSA (unless the FSA is a limited purpose HCFSA with reimbursements restricted to dental and vision expenses).
withdraw your 2020 contributions from the HSA + any earnings thereon before 12/31/2020. any earnings are taxable.
if your spouse has an FSA or an HRA with medical expense reimbursement through their employer, you are disqualified from participating in an HSA.
however, there are certain HRA's that don't prevent contributions to your HSA
2016 is a closed year so you should file amended returns for 2017-2019 showing excess HSA contributions. since so many years are involved consult a tax pro.
Case Study:
ABC Company offers benefits on a calendar year basis. Effective January 1, 2020, they will begin offering an HSA qualified HDHP and will make HSA contributions to those who are eligible and establish an HSA. Employee John is interested in the HSA, his wife Mary is also employed. Her employer’s plan also runs on a calendar year basis. Mary is currently enrolled in a standard health care FSA through her employer.
Can John begin contributing to the new HSA offered by his employer on January 1st?
NO! Because he is eligible to receive health care benefits under Mary’s FSA, John cannot contribute (or receive employer contributions) to an HSA until he is no longer covered by a standard HCFSA.
What if John and Mary exhaust Mary’s FSA balance prior to December 31st?
Unfortunately this still does not permit John to contribute to an HSA. The coverage under the FSA applies to the entire plan year in which you had coverage, not just the duration of when funds are available.
Can Mary terminate her FSA as of November 1st?
Unfortunately no. The open enrollment of one spouse does not allow for the other spouse to change their FSA benefit mid-year. This is not a permitted election change event.
Can Mary convert her standard HCFSA to a limited purpose HCFSA as of November 1st?
The regulations are very unclear and additional guidance from the IRS would be appreciated. Based on the change of election rules, there is nothing that expressly permits this at the participant level. Please check with your administrator for their interpretation of the regulations.
What is the earliest John can begin contributing to an HSA?
The earliest John would be eligible to contribute to an HSA (assuming he meets all other requirements to be HSA eligible and has no other disqualifying coverage) would be January 1, 2021. However, Mary’s can't have an FSA as of 1/1/2021
