Contributed both FSA and HSA in 2020, how to correct?

[yihan21]

Good morning,

I just found out my wife contributed $2,700 FSA in 2020 and I also contributed $7,100 HSA in 2020. My wife and I had high deductable family health insurance from Mar 2020 to Dec 2020 (due to my job change). She had her own insurance from her workplace and I had my own insurance from my old workplace from Jan to Feb 2020. My questions are:

1. How to correct this in the tax return?

2. Ideally I would like to keep the HSA contribution and correct the FSA contribution, is this possible? 

Thanks for your help. 

Best,

Ying

[Opus 17]

2. No, you can't keep both.  Because the FSA can be used to pay for medical expenses for the owner, their spouse, or dependents, it counts as "other medical coverage" and disqualifies you from making any HSA contributions.

1.  In Turbotax, answer "no" to the question about a qualifying HDHP.  (Because you had other coverage, you did not have a qualifying HDHP.).   Your workplace contributions are captured on your W-2, and you must enter separate out of pocket contributions (if any) when asked later.  Turbotax will then tell you that you have excess contributions of $7100.  You must remove those contributions by the filing deadline of May 17.  This is not a normal withdrawal, it is a special "withdrawal of excess contribution" and may require a special form or procedure with the HSA bank.  You must also withdraw any earnings due to the excess contribution, which the bank will do automatically, and which you will report as taxable income on your 2021 tax return.  The excess contributions that you removed from the HSA will be added back to your taxable wages.

If you don't remove the excess, they will still be added to your taxable wages, plus you will pay a 6% penalty, and this 6% penalty will continue through every future year that the excess funds remain in the HSA.

If your balance as of 12/31/2020 is less than the excess, remove the entire balance as of 12/31/2020.  The 6% penalty is based on the amount of excess contributions in the account, or the total balance of the account, whichever is lower.  

[yihan21]

Thanks. May I have my FSA withdraw instead of HSA? Or I must withdaw the HSA?

[Opus 17 · Accepted solution]

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@yihan21 wrote:

Thanks. May I have my FSA withdraw instead of HSA? Or I must withdaw the HSA?

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First of all no, that's not permitted.  Second, there should not be any money left in the 2020 FSA at this point, it is "use it or lose it", unless her plan allows a grace period.  There is no method allowed in the law to cancel the FSA, repay the expenses, and make it as if the FSA never existed for 2020.

Furthermore, if you do have a "carry forward" amount in the FSA that you can use in 2021 during a grace period, that also counts as "other coverage" and disqualifies you from making 2021 contributions to the HSA, for as long as there are funds in the FSA, even if your wife did not re-enroll in the FSA for 2021.

If your wife did re-enroll in a medical FSA for 2021, that will disallow all HSA contributions for 2021.  Normally, a medical FSA can't be canceled once you enroll, unless you have a qualifying life event that allows changes to your benefits (like marriage, divorce, change of job, or birth of a child).   However, one of the COVID relief provisions allows employers to permit their employees to make mid-year changes, such as canceling an FSA without a qualifying life event.  Employers are not required to permit employees to do this, but the employer can change the rules to permit employees to do this if the employer chooses.  In that case, you would be eligible to make HSA contributions beginning the first day of the month after the FSA funds are spent.

https://www.irs.gov/pub/irs-drop/n-21-15.pdf