Contributions to spouse HSA and my FSA (different plan start/end dates)

[l141]

Hello,

I've been doing research on my quandary but am not sure I've truly got this figured out. Hoping the community can help! Here is the situation:

I have a non-HDHP insurance plan through my employer and enrolled in a general purpose health FSA for the plan year July 1, 2022 - June 30, 2023. At the same time, my husband has an HDHP & HSA through his employer (plan year Jan 1 - Dec 31, it's been in place since 2015). We are both on separate self-only insurance plans. I didn't realize until today that we can't have both an FSA and HSA at the same time.

Since my husband's HDHP/HSA was in place for 6 months prior to the start of my FSA (I assume this would be considered a disqualifying event), is the year prorated and he could keep $1825 in his HSA, or would the entire year be disqualified?

Along those lines, since my FSA account will be spent down to $0 by the end of my plan year (June 30, 2022), is it ok that he has been contributing to his HSA this plan year? It seemed like this could also be prorated for the 6 months without FSA and he could contribute $1925 for the year, or the full amount ($3850) with the 'last-month rule' since he would be enrolled/eligible on Dec 1 and through Dec 31 of the next year (provided the entire year is not disqualified). I won't be doing another FSA 😉

Depending on the answers to the questions above it sounds like I've got a couple of options to fix this?

1. Submit an amended tax return for 2023 - take out the excess contributions plus any interest accrued, claim this as taxable income, and pay the income tax and 6% excise tax. This could either be $1825 if prorated or the full $3650 if not.

2. Reduce HSA contributions this year by the excess last year. Pay a 6% excise tax on the excess on the 2024 tax return. Again this could either be $1825 if prorated or the full $3650 if not. Depending on the amount and if he can do the last-month rule, he may have to take out contributions made this year as excess. This would be before the 2024 tax filing deadline.

Does this sound correct?

Thanks!

[Opus 17]

You got it 99% correct. 

1. Beginning on 7/1/22, your husband was ineligible to make contributions.  His eligible limit for 2022 was $1825, assuming he was enrolled in single HDHP coverage. ($304.16 per eligible month)

2. If your FSA ends on 6/30/23, and you do not re-enroll in the FSA**, and you have no funds to spend in a grace period, then your husband is eligible to make contributions beginning 7/1/23.  If he remains eligible for all of 2023 and plans to remain eligible for all of 2024, he can use the "last month rule" to contribute the 2023 maximum of $3850 as if he were eligible all year.   (Note that even if you had funds available to use in a grace period, and he did not technically become eligible until 9/1/23 or 10/1/23, he can still use the last month rule to contribute the maximum amount.)

**You can enroll in a "limited purpose FSA" if your employer offers it.  A limited purpose FSA only covers certain items that do not conflict with the HSA rules, mainly dental and vision care.  If you are expecting dental work, or wear glasses or contacts, you might look into using a limited purpose FSA to pay for those things.  The full list of items that can be paid from a limited purpose FSA is found in publication 969.

https://www.irs.gov/publications/p969#en_US_2022_publink1000204039

3. Your husband has $1825 of excess contributions for 2022.  There are 3 ways of dealing with this, one of which has really high taxes so I won't discuss that here.  The two more sensible options are:

A. Contact the HSA bank and remove the $1825 excess contribution along with any earnings.  File an amended 2022 return (not 2023-- the return you filed in April 2023 was for tax year 2022) to report that he was ineligible for 6 months.  Turbotax will add back the $1825 to his taxable income.  You will also report that you removed the excess before the deadline.  You will not be assessed a penalty.  You must file this amended return by mail and write “Filed pursuant to section 301.9100-2” on the top of the first page, and include a written explanation of the late withdrawal.  Any income from the excess will be taxable income in 2023, the year you withdrew it. (This amended return must be filed before October 18, 2023.)

B. Leave the excess in the HSA.  File an amended 2022 return to report that he was ineligible for 6 months.  Turbotax will add back the $1825 to his taxable income.  Because you have not removed the excess, you will also be assessed a 6% penalty.  You can e-file this amended return.  Then, stop your husband's HSA contributions for 2023 by June 30, or adjust them down, so his total 2023 contributions do not exceed $2025.  Since the 2023 limit is $3850, he can contribute up to $2025, and the excess $1825 will be applied to the 2023 limit (making a total of $3850). In other words, he can "use up" the excess by contributing less than the maximum for 2023.   Your 2023 tax return will show no excess contribution remaining in the account and no further penalties.

If for some reason your husband becomes ineligible in 2024, after relying on the last month rule in 2023, he would owe a penalty on his 2024 return.  So if you are planning a job change or insurance change in 2024, you may want to re-think using the last month rule in 2023.

[l141]

Awesome, thank you so much! This was extremely helpful.

I do have one question though, with regards to fixing the situation. It sounds like with option A we pay income tax on the $1825 excess contribution and with option B we pay income tax and the 6% penalty on the $1825 excess? I was thinking with option B we would only pay the 6% penalty since the excess could be applied to this year's contribution.

Thanks!

[Opus 17]

@l141 

under both methods, you must pay income tax on the ineligible contribution, because it is not allowed to be taxed deductible or excluded from income. 2022 doesn’t know what you might, or might not do in 2023.

If you leave the money in the HSA and apply it toward the 2023 contribution limit, the instructions say that you take the tax deduction in 2023.  I can’t see where that calculation occurs in the actual form, but there is probably an internal hidden TurboTax worksheet that takes care of it for you.  You should be asked as part of your 2023 tax return whether you had any excess to carryover from 2022, or that information will be automatically carried over if you import your 2022 file to start your 2023 return.

in other words, if you withdraw the money, you pay income tax, because it was not an allowable deduction. Then you make new contribution of the full amount for 2023 and you get a tax deduction. Or, leave the money in the account and you pay income tax, because it was not an allowable deduction, plus the penalty. Then if you apply that excess toward the 2023 limit, it now counts as a 2023 contribution and you get the tax deduction then. So either way, your tax deduction is the same, $1825 in 2022 and $3850 in 2023. 

[l141]

Got it, thank you!