For an HSA, the plan is a High Deductible Health Plan (HDHP), which is a health insurance policy with certain deductibles and other attributes. To be able to contribute to an HSA, a taxpayer has to be covered by an HDHP and have no conflicting coverage like an FSA or HRA or spouse's employer insurance or Medicare, to give the most prominent examples.
So when you say, "Wife enrolls in 2025 HSA (husband IS NOT on the plan)", do you mean that the wife is covered by an HDHP policy? Is it Self-only or Family (it is possible to have a Family HDHP policy with one spouse and one or more dependents, but not the other spouse)?
So when you say, "Husband has a 2025 rollover from 2024 FSA", do you means that the husband's FSA in 2025 allowed for a grace period from 2024 for expenses that had not yet been used? How long is this grace period (it varies from employer to employer)?
The difficulty of FSAs and HSAs is that an FSA automatically covers both spouses - there is no way for one spouse to opt out of the other's FSA. Thus, when one spouse has an FSA, neither spouse can contribute to an HSA. on the principle that you can't have any competing insurance or medical benefits to the HDHP, except for a narrow list shown in Pub 969.
Of course, HSAs predate the concept of FSAs having a grace period, so I do not know if there has been any specific ruling on your particular situation. My guess, though, is that you can't claim HDHP coverage for the months during the FSA's grace period.
So if the FSA's grace period is 3 months, that means that you don't claim HDHP coverage for those three months in the HSA interview in TurboTax.
So, to be clear, the wife can create an HSA any time if she has HDHP coverage but cannot contribute to it until the husband's grace period has expired.
1. So when you say, "Wife enrolls in 2025 HSA (husband IS NOT on the plan)", do you mean that the wife is covered by an HDHP policy? Is it Self-only or Family (it is possible to have a Family HDHP policy with one spouse and one or more dependents, but not the other spouse)? You are right, it is a family with one spouse +dependent (without the HSA spouse) plan.
2. "Grace period?" Rollover from 2024 to 2025 means rollover the remaining balance from 2024 to 2025. So, in 2025, do you mean after the husband empties the remaining balance of the FSA account, then the wife can contribute to HSA, or does it mean the wife can't enroll in the 2025 HSA due to the husband having a rollover balance from 2024 FSA to 2025 FSA?
Thank you very much for your help.
Are you saying that his employer FSA plan allows a carryover and not a grace period? Hmmmn, grace periods are more common than carryovers, which is what I assumed "rollover" referred to.
In that case, I would urge you guys to spend that carryover money as quickly as possible and document it when it is gone. Then in the month after the last of the carryover is gone, start your HSA contributions.
What you do NOT want is the choice to pay for medical expenses from either the FSA or the HSA (yes, I recognize that you don't have anything in the HSA yet). We don't want any overlap between the two.
Just make sure that in no month can he pay for medical expenses from his FSA while you are contributing to the HSA.
Thank you very much for the response.
Please advise: 1, HSA has been contributed starting in 2025. What should they do with the HSA contributions?
2. The FSA account has been "inactive" since 01/01/25 because the FSA company is clearing up the 2024 expenses. It will be unlocked and return as active at the end of March/April. So, do you mean no HSA contributions for those times till the account returns active and they empty the account?
I am sorry, but you have an unusual situation. Locking an FSA account? It taking 3+ months to close the FSA books on 2024? This is unusual.
And when you add that to having a carryover of FSA funds from 2024 rather than the more common grace period (companies like the grace period, because it means that the requests for payment will be over and done with, not being deferred until the night of December 31st), you have found yourselves in a situation that to my knowledge has not been discussed by the IRS in its notices.
My feeling is that it would be difficult to explain why it was OK to do HSA contributions one month, then FSA reimbursements the next month, then back to HSA contributions. The programs were not set up that way.
Normally, if you have an FSA, it's for all year. I was only interested in finding out your grace period to pin down when your FSA program had definitely ended.
Well, as you know, we do not do your tax returns here on the Community (we do have a TurboTax Live Full Service that will complete and sign your return). We provide information on what the IRS and the States say, but if there is no previous statement on your exact situation, all I can say is that whatever you decide, document it completely, in case any one ever asks.
Thank you so much for your explanation. One more question: If decide to exhaust the carry-over remaining balance now and then back to HSA, then what to do with the already contributed HSA fund from 01/01/25-current? Withdraw it? Contact with the HSA company? Will there be an additional tax (10%) besides the income tax on those contributions/withdrawals? and penalties? How about the employer contribution?
After the fund is exhausted in March, continue to contribute to HSA (basically next month in April). Is there a rule that the 2025 HSA contribution is through 4/15/2026? So in 01/2026, two contributions can be made (one for 2025 and another for 2026)?
So you are saying that you have already contributed funds to your HSA?
The thing is that excess contributions (contributions in excess of your computed annual HSA contribution limit, which an FSA affects) are done on a calendar basis. Also, there are no dates attached to contributions either. This means that it does not matter whether or not you were covered in any particular month under an HDHP policy with no conflicts, it only matters that when at the end of the year, do your contributions exceed your computed annual HSA contribution limit.
So if you are going to assume that you are clear of the FSA at some month in 2025 and start your HDHP coverage on the next month, if what you contributed already does not exceed the calculated annual HSA contribution limit, then there is not need to remove anything from your HSA. Note: this is called "withdrawal of excess contributions" at your HSA website.
Note that I don't have enough information from you to tell you if you will have excess contributions or not.
"Is there a rule that the 2025 HSA contribution is through 4/15/2026?" - See below.
"So in 01/2026, two contributions can be made (one for 2025 and another for 2026)?" You CAN contribute in 2026 for 2025, up to the due date of your 2025 return (April 15, 2026). Note that if you do this, you MUST make sure that your HSA custodian is aware that the contribution is for 2025, or else it will default to 2026.
Thank you very much for your help!!
is there a rule called “HSA last month rule” means if the taxpayer is eligible in the testing period (12/1/2025-12/31/2026), then, the taxpayer is treated qualified for the whole tax year(2025)? In that case, the wife should be qualified on 12/1/2025, and no FSA plan in 2026, then she is eligible to contribute for the full year(2025), correct?
I want to recap here.
Wife is eligible to contribute to an HSA if she is enrolled in an individual or family HDHP and has no "other coverage" that disqualifies the wife. The husband's FSA counts as "other coverage", since it can be used to pay the expenses of the husband or the wife. You first need to determine when the FSA ends.
IRS allows a maximum grace period to use up the funds of 2-1/2 months. So coverage by the FSA must end no later than March 15, or whenever the funds are used up, whichever comes first. Even if the account is locked and claims can't be submitted until later, you are not allowed to submit any claim that occurred after the end of the grace period (March 15). In other words, if the account is locked and you can't submit a claim until after April 1, you could still only submit a claim that was paid before March 15. A claim after March 15 should be denied by the FSA administrator. On the other hand, if you have enough expenses in January to use up the FSA, then it ends in January even if you can't submit the claim until later.
Your eligibility to contribute to an HSA is determined by your medical coverage on the first day of each month. That determines the total amount you are eligible for the year, but it does not matter when in the year the contributions are made. It's ok to make contributions in January or February even if you still have the FSA, as long as your overall total for the year is not more than your limit.
The family coverage limit for 2025 is $8550, or $712.50 per month, so using the standard rules, if the FSA coverage extended to March 15, your limit for 2025 would be 9 months x $712.50 = $6412.50.
Yes, you can use the last month rule. If you are eligible on December 1, 2025 and plan to remain eligible for all of 2026, you can contribute the full amount of $8550 for 2025.
Yes, except in practice the testing period is actually the next tax year, Jan 1 to Dec 31.
If you think about it, in order to take advantage of the "last-month" rule, you would have had to have coverage on December 1st, which means you already are covered from December 1st to December 31st. So really, it is the next tax year that we are talking about.
I don't know why the IRS put that example in the Instructions for the 8889, since you can't fail to be covered for the rest of December, although it does seem to follow the equally odd wording in the Tax Code: "(iii)Testing period - The term “testing period” means the period beginning with the last month of the taxable year referred to in subparagraph (A) and ending on the last day of the 12th month following such month."
Thank you very much for looking into this. So, for the current situation, can the wife use the "last month rule" to contribute to the 2025 HSA? She would be eligible on 12/1/2025 due to the FSA fund would have been exhausted in March or April. The testing period on the regulation is "12/1/2025-12/31/2026" for the 2025 year's contribution. It is confusing.
As we discussed, your husband's FSA is allowing a carryover not a grace period. A grace period has a definite ending. But the carryover could last all year - you admitted that you did know when the money would run out.
As I noted, you can't be in a position of being able to pay for expenses from both the FSA and the HSA at the same time.
As I also noted, this is unknown territory, the idea of when you can started contributing to an HSA when you are not currently signed up for an FSA but are enjoying the carryover of FSA funds from the previous year. So there is no hard and fast rule here.
You just have to document what you choose to do and why, in case anyone else asks.
"The testing period on the regulation is "12/1/2025-12/31/2026" for the 2025 year's contribution" Yes, I know it says that but you can't have HDHP coverage on December 1st for the "last-month rule" without already being covered for the month of December, so 1/1/2025 to 12/31/2025 would make more sense. It would be one year and not 13 months.
Thank you very much for a detailed explanation. The only part I am unsure about is that the company doesn't provide a "grace period" but a "rollover" for FSA. So, can we use the "grace period" rule for the "rollover" plan? If so, the plan must be exhausted in 2 days to meet the "grace period" rule, correct? Then, use the "last month rule" to contribute to the full-year HSA plan, correct?
It's "carryover" not "rollover". The IRS says, "A plan may allow either the grace period or a carryover, but it may not allow both." (page 18, IRS Pub 969)
And you must use whatever is in your company's plan - so you have to ask them how their plan is written.
"If so, the plan must be exhausted in 2 days to meet the "grace period" rule, correct? "
No, as I have said several times, there is no rule for this and I don't believe that the IRS has ever made a statement on this particular situation.
I have expressed what I thought would be a reasonable solution, but there are no rules here. That's why I have repeatedly said that whatever you choose, document it well (i.e., what did you do and why did you do it).
@wendy3152020 wrote:
Thank you very much for looking into this. So, for the current situation, can the wife use the "last month rule" to contribute to the 2025 HSA? She would be eligible on 12/1/2025 due to the FSA fund would have been exhausted in March or April. The testing period on the regulation is "12/1/2025-12/31/2026" for the 2025 year's contribution. It is confusing.
Yes, as I said, you can use the last month rule if you are covered on the last month of the year and plan to be covered for all of the next year. If you fail to be covered for all of the next year (fail the testing period), part of your prior year contributions will be penalized.
@wendy3152020 wrote:
Thank you very much for a detailed explanation. The only part I am unsure about is that the company doesn't provide a "grace period" but a "rollover" for FSA. So, can we use the "grace period" rule for the "rollover" plan? If so, the plan must be exhausted in 2 days to meet the "grace period" rule, correct? Then, use the "last month rule" to contribute to the full-year HSA plan, correct?
We need to clarify this.
A "grace period" means that the company can allow the employee to submit claims for medical expenses that occur between January 1 and March 15, 2025, to be reimbursed from the unspent 2024 funds. It is not technically a carry over. There is no dollar limit on the amount of funds that can be used in the grace period. Your husband can be "not a plan participant" in 2025, and still use the 2024 funds during the grace period. The FSA ends on March 15, or when the funds are spent, whichever comes first. After the FSA is empty, or after March 15, and as long as your husband is not a participant for 2025, then you are eligible to make HSA contributions.
A "carry over" means that unspent funds (up to $640) may be carried over for 2025 expenses ("the following plan year.") Those funds would be added to any funds contributed for the 2025 plan year. Importantly, if you have a carry over, then you are a participant in the plan for all of 2025, and are never eligible to contribute to an HSA for 2025, even using the last month rule.
A plan can't allow both a grace period and a carry over, it is one or the other.
So again to clarify,