Switched from FSA to HSA mid-year - Everything OK?

[Anonymous]

I got married, so that is a qualifying life event. I went into my FSA and changed cancelled all future contributions and submitted receipts in the amount of the remaining balance, so I essentially cashed-out the FSA. So, that FSA is essentially terminated.

Two days later, I used the QLE to switch health care plans to an HDHP with an HSA, and I now have an HSA. I know you can't have an FSA and an HSA at the same time, but some of the things I've seen online say you can't even have them both in the same year. Can someone shed some light on this? Am I eligible to contribute up to the HSA maximum for this year? Am I violating some tax code by even HAVING an HSA right now, when I had a FSA earlier this year (but that was officially terminated before opening the HSA?)

Thanks for any advice.

[Critter]

You are fine....you cannot contribute to both at the same time however you can have both in the same tax year.

[BMcCalpin · Accepted solution]

As Critter notes, the problem isn't having an FSA and an HSA at the same time, it's contributing to them at the same time. This is because an HSA is somewhat like an IRA - it belongs to you and not your employer. Even if you lost HDHP coverage in the future, you could still keep your HSA and pay expenses out of it - you just couldn't contribute any more until you were back under HDHP coverage.

OK, some thoughts:

1. I assume that your FSA was a general purpose health FSA, right? It's just that there are some other FSAs that don't conflict with HSAs anyway. Limited purpose FSAs that don't conflict with HSA would cover only:

• Liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property.

• A specific disease or illness.

• A fixed amount per day (or other period) of hospitalization

• Accidents.

• Disability.

• Dental care.

• Vision care.

• Long-term care.

2. OK, let's assume that you had a general purpose health FSA and are right to worry about this. According to your employer's plan, are you no longer eligible to have medical expenses paid under the FSA? That is, has the plan definitely ended for you, or did you just use all the money? I ask because the FSA rules state (among other things) "You can use an FSA to pay qualified medical expenses even if you haven’t yet placed the funds in the account." That is, having zero funds at the moment may not be sufficient to "end" your participation if you are still in the FSA plan but just don't happen to have any funds in it at the moment but could under the plan rules still contribute to it. If your employer confirms that you were no longer eligible for any payments from the FSA before the HDHP coverage started, then that's good.

3. "Normally" the annual HSA contribution limit would be based on the number of months that you had the HDHP coverage. So, 6 months would be 50% of the annual contribution limit for Self or Family HDHP coverage, whichever you have. HOWEVER, if you have HDHP coverage (and no conflicting coverage) on December 1 of the tax year, then the "last-month rule" allows you to use the full annual HSA contribution limit, no matter how few months you were under HDHP coverage. There is one catch: if you do this (and TurboTax will apply the last-month rule automatically), then you must remain under HDHP coverage for the entire "testing period", which is generally the next tax year. So if you went under HDHP coverage on or before December 1, 2018, you can use the full annual HSA contribution limit for tax year 2018, but only if you stay under the HDHP coverage for all of 2019. If you drop the HDHP coverage at some point in 2019, then when you do your 2019 return, your annual contribution limit for 2018 will be recalculated based on the actual months you had coverage in 2018, and you may have excess HSA contributions in 2018 which would appear on your 2019 return. It's not the end of the world, I just want you to be aware of what the "testing period" involves.

4. Note that your coverage for the month is determined by your coverage on the first day of the month. Thus, if you were clear of the FSA by July 2 and started the HDHP coverage on July 4, then as far as the HSA rules are concerned, you still had FSA coverage for July and your HDHP coverage did not start until August.

Make sense?

[Anonymous]

Thanks for such a fulsome response. Since you're so helpful, here's some additional details that, if you have time, I'd love for you to gut-check me on.

Yes, it was a general health care FSA. I used the QLE (the marriage) with the FSA to reduce this year's contribution amount to the exact amount that was in the account at that moment, essentially preventing any further contributions. I submitted receipts to bring the balance of the account down to $0. I then received an email from FSAFEDS on September 10 that said, "This email is to notify you of activity on your account: Your coverage was ended." I'm hoping that means the FSA was dead at that point?

The HDHP plan became effective September 15. The HSA was opened automatically, and the first contribution reached the HSA on September 30. I intend to max it out this year under the "last month" rule and keep the HDHP all next year.

So, given all that - am I still good, @BMcCalpin? Thanks again!

[BMcCalpin]

"Your coverage was ended" - if your participation in the FSA was terminated prior to September 30th, then yes.

"The HSA was opened automatically, " HSAs are not opened automatically; instead, in most cases your employer helps you sign up for it when you sign up for the HDHP coverage (even if you didn't realize it at the time). But as I noted above, the HSA belongs to you, not the employer, so if you leave the employer you do NOT have to close the HSA - in fact, that's a very expensive thing to do.

The HSA is created per state law. Generally, this is when the first contribution reaches the HSA. This can be important because of another funny HSA rule: you can ask the HSA custodian to reimburse you for medical expenses that were incurred after the HSA was created.

For example, you had a qualifying medical expense on October 1st. Suppose you did not have enough money in the HSA to pay the bill, so you paid it with after-tax dollars at the time. Later, say in February of the following year, you now have enough money in the HSA to pay this bill. At that point, you can call your HSA custodian and ask that the HSA custodian send you ("reimburse") the amount equal to the bill that you paid on October 1st. Since the amount passed through the HSA, you received a tax benefit when the original contribution was made to the HSA, so you, in effect, received a discount on your medical bill.

Note that the IRS does not place a deadline on when you reimburse yourself - it could be years later. The only limit is that the original medical expense had to take place after the HSA was created.

Your plan is the normal plan, to stay under HDHP coverage for the next year. However, as we have seen here at TurboTax, people are sometimes unexpectedly terminated anyway. I wanted you to be prepared if the worst happens.

Note that it does not matter how you happen to be covered by an HDHP to be able to qualify for the testing period (and be able to contribute to the HSA). Thus, if you were laid off but qualified for COBRA coverage, then if the COBRA policy was also an HDHP, then your HSA status would remain the same - the HDHP coverage does not have to be from your employer or any employer (in fact, it could be from your spouse). This may affect your decision to take COBRA after a termination (usually an expensive option), since it would allow you to avoid declaring the excess HSA contributions from the previous year as income and paying penalties.