HSA and FSA

[tjpdigital]

What are the penalties for having both an HSA and an FSA in the same year?  

Our situation was unintentional... but either way, here we are.  My wife's company insurance auto-signed her up for an FSA and wouldn't allow her to change it after the fact.  I had already elected continued the HSA I've had for a few years through my company's insurance plan.

What do we need to do about this situation come tax time?  Does the amount of money contributed affect any potential penalties?  

Thanks!

[Critter]

Ok ... so she has an FSA and you have an HSA ? If so that is allowed since you both have insurance thru your individual employers.

[tjpdigital]

Interesting!  Well, that's good news.  Would you happen to have a link that explains that that is the case??  I assume this would not require that we file taxes separately or anything, correct?  Also do you happen to know if it matters if medical expenses for her, have been paid via my HSA while she has that FSA?  I know spouses are covered even if they're not on my insurance.. but does her FSA complicate this at all?  Thanks for the response!

[BMcCalpin · Accepted solution]

The way that FSAs and HSAs work is this:

1. An FSA always covers both spouses, which means that it is a disqualifying health coverage for the spouse (you?) with the HDHP policy.

2. This means that while you are covered by the FSA, that you cannot contribute to your HSA. So if we are speaking about 2019, then any contributions that you have made in 2019 will need to be withdrawn.

3. However, your HSA doesn't go away - you just can't contribute to it while you are covered by the FSA.

4. You can still take distributions (spend money) on qualifying medical expenses from the HSA even while covered by the FSA.

5. The limiting factor is that you cannot use funds from both the FSA and the HSA for the same medical expenses.

6. Your coverage for the month is determined by the coverage on the first day of the month, so if your spouse started coverage on January 15, then the first month you have disqualifying coverage in February.

To withdraw any HSA already contributed to your HSA in 2019, you will need to contact your HSA custodian and ask for a withdrawal of excess contributions. The custodian will send you a form to complete for this purpose (or it may be online - look for it), and then they will send you a check for the amount of the contributions. Yes, this will become income and you will have to pay income tax on it.

Do not worry about the earnings on the amount on the excess contributions - the HSA custodian will calculate that and put it on a 1099-SA for either 2019 or 2020. It will have a "2" for the distribution code in box 3 and the amount of the earnings in box 2. This will be added to your income in whatever year the 1099-SA is for (2019 or 2020).

When you do your tax return in TurboTax, you will have to indicate that you were not covered by an HDHP for any month in 2019 (if your spouse was covered all year, otherwise indicate which months). This will cause TurboTax to take steps to ask if you have or will withdraw the contributions (which are probably on your W-2 in box 12 with a code of W), add the amount to your income, and generate a correct form 8889. If you get more than one 1099-SA, enter them both unless one is marked "Corrected" in which case enter that one and not the first one.

NOTE!!! Be sure to get payroll to stop the HSA withholding in your paychecks!!! In fact, you might as well not do the request for the withdrawal of excess contributions until you are sure that the payroll deduction for the HSA has stopped (so you do the request only once).

[BMcCalpin]

Oh, sorry, the interaction of HSAs and FSAs is described in IRS Publication 969 (https://www.irs.gov/publications/p969/index.html ); however, it is not the most clear of documents. Come back if you have any questions.

[tjpdigital]

Awesome info @BMcCalpin !  This is very helpful.

1. An FSA always covers both spouses... -  Ok even though I'm not on her insurance, I'm technically covered by that FSA the same way she is by the HSA.  Which causes this issue.  Makes sense!

2. This means that while you are covered by the FSA, that you cannot contribute to your HSA... - I actually immediately halted my contributions to the HSA after we discovered having both isn't allowed.  Shortly after her insurance began. 

5. The limiting factor is that you cannot use funds from both the FSA and the HSA for the same medical expenses. -  Does this mean literally the same bill?  You're not allowed to pay 50% of a prescription for the FSA and the other 50% from the HSA.  If that's correct, we should be fine.  She only put 90$ in that FSA and hasn't actually used it for anything.  But the HSA has been used this year (solo)

6. Your coverage for the month is determined by the coverage on the first day of the month - I'll have to double check our records but I'll bet her insurance started mid-month (Jan15th) and because I halted contributions almost immediately... there might not be any overlap into the following month (Feb1st). 

If this isn't quite the case, if there is maybe 1 or 2 paycheck contributions to the HSA before it was halted.  Those 1 or 2 contributions are all that would need to be withdrawn via the custodian, correct?  Not the entire years-worth.  

Again, thanks so much!  This is extremely helpful.

[BMcCalpin]

1. An FSA always covers both spouses... -  Ok even though I'm not on her insurance, I'm technically covered by that FSA the same way she is by the HSA.  Which causes this issue.  Makes sense! - yes, kinda sort of...which is not to say that FSAs are otherwise similar to HSAs because they're not.

2. This means that while you are covered by the FSA, that you cannot contribute to your HSA... - I actually immediately halted my contributions to the HSA after we discovered having both isn't allowed.  Shortly after her insurance began. - smart move!

5. The limiting factor is that you cannot use funds from both the FSA and the HSA for the same medical expenses. -  Does this mean literally the same bill?  You're not allowed to pay 50% of a prescription for the FSA and the other 50% from the HSA.  If that's correct, we should be fine.  She only put 90$ in that FSA and hasn't actually used it for anything.  But the HSA has been used this year (solo) - Pay each billl with either HSA funds or FSA funds, not both. But note this:

"You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year."

See https://www.irs.gov/publications/p969#en_US_2018_publink[phone number removed]

So you have access to entire FSA amount on January 1st even if you haven't paid it yet...also depending on your FSA plan, you may not be able to carry over much or any of the unspent FSA funds to the next year. Please read the section with the title "Balance in an FSA" at the link above, and spend all your FSA funds first.

6. Your coverage for the month is determined by the coverage on the first day of the month -So your spouse really started FSA coverage on January 15th? This would mean that you had HDHP coverage (without conflict) for one month or 1/12th of the year. In 2019, the annual HSA contribution limit for a couple with Family HDHP coverage (I assume that's what you have) is $7,000, so 1/12th is $583. If you (as owner of the HSA) are 55 or older by 12/31/2019, then you can add 1/12th of $1,000 to that amount ($83).

It looks like you're not talking about a lot of money, maybe 1 or 2 contributions too many. You may just choose to do nothing about the excess until you file your tax return in February (you file early, right? You should - less chance of identity theft). At that point TurboTax will walk you through the process in the HSA interview.

[tjpdigital]

Fantastic.  Thanks for the follow up and all the help!

It looks like you're not talking about a lot of money, maybe 1 or 2 contributions too many....

Yep! After looking at records, there is only one partial deposit that made it into the HSA after this happened.

So it definitely not a bunch of money.  And now with your helps I know it can be sorted relatively simply. 

I'll probably just do the "HSA interview" route, like you suggested.

[pgdiehl]

What about an adult child signing up for tax coverage for the first time?

My 25 year old daughter has the option to sign up for a HDHC plan with an HSA. I am still covering her on my conventional plan with an FSA. Is she governed by the same rules, or not? The IRS publication is really not clear. 

Should she not contribute to the HSA until she ages out at 26?

Along those same lines, I know I couldn't cover her if I had an HSA(which I don't) because she is not a tax dependent. But I read that I can cover her with my FSA because of her age. Do I have that right? Or will she become ineligible once her HDHC goes into affect?

It'll be so much less complicated once she ages out. I'm just so grateful she has access to health care on her own now.

[Anonymous]

a HSA is a savings account set up exclusively for paying the qualified medical expenses of the account beneficiary (your daughter).  it would seem she has no spouse or dependents so only her medical expenses would be qualified if she was qualified to have an HSA.  Based on the rules below she is not eligible for 2019.

to be an eligible individual to have an HSA all these test must be met

1) must be covered under a high deductible health plan (HDHP)

2) may not be cover under a non HDHP  (coverage by an FSA is considered coverage by such a plan - so she can not contribute to her HSA while covered by your FSA)

3) can't be claimed as a dependent on another's return.  even though she is 25,  she could be eligible to be claimed on your return as a qualifying relative.

here are the tests. if any one is failed she is not a qualifying relative.

1) meets relationship test (same as for qualifying child) - she meets this test 
2) gross income for 2019 less than $4,200
3) you provides over ½ her support

there is a last month rule, which would have allowed her to contribute to her HSA for all of 2019 provided she was not covered by non_HDHP on 12/1/2019.

i conclude she is not eligible for an HSA in 2019

for her to be eligible for 2019 you need to drop your coverage of her before 12/1/2020,  it really makes no sense for you and her to have medical insurance for her.  most policies provide for coordination of benefits when there are multiple policies covering the same individual  

[pgdiehl]

Thank you for your quick response.

If I drop my non-HDHP coverage for her by 12/1/2020, then she is eligible to contribute to an HSA for all of 2020? Is that what I'm hearing?

If so, then that loop hole works for us because she turns 26 in November and will no longer be covered on my plan.

If that is not the case, then I will advise her to not contribute to her HSA until after her birthday.

Thanks you - Paula

[BMcCalpin]

"for her to be eligible for 2019 you need to drop your coverage of her before 12/1/2020"

I think that this is a typo, s/b "for her to be eligible for 2019 you need to drop your coverage of her before 12/1/2019" or "for her to be eligible for 2020 you need to drop your coverage of her before 12/1/2020"

Do I understand you @pgdiehl  to say that your daughter will turn 26 sometime in November of 2020? If so, the following things need to happen to get the ability to contribute to an HSA for tax year 2020 (as opposed to just IN calendar year 2020, because you can still contribute to your HSA for tax year 2019 up through the due date of the return in 2020):

1. She must be covered by an HDHP no later than December 1, 2020.

2. She must NOT be covered by your FSA in any capacity on December 1, 2020; i.e., there is no way that she can file a claim for FSA reimbursement on or after that date under the FSA plan rules (this is a question for the FSA plan administrator).

3. She cannot be claimed as a dependent in tax year 2020 (i.e., next year) - note that it does not matter if she actually is - even if you don't claim her as a dependent but she otherwise satisfies the requirements, then she cannot contribute to an HSA.

4. Because of the last-month rule, on or after December 1, 2020 (up until the due date of her return in 2021), she can contribute up to the annual HSA contribution limit for 2020 (which is normally updated by the IRS each year).

5. If she does this, however, she will be required to stay under the HDHP coverage (and otherwise qualified to contribute to an HSA) through all of 2021 ("the testing period"). If she changes jobs or the employer switches to a non-HDHP insurance, then she will have to reconcile this (pay tax on the tax benefit she got from using the last-month rule) in 2021. However, don't worry about this until it actually happens and she files her 2021 return. If it happens, TurboTax will walk you through it.

[swfyau83]

Hi BMcCalpin,

I am in a similar situation where I had an HSA opened this year and my wife still was contributing to an FSA, with an overlap of 6 months.

I took the steps in your message. I chose that I was not covered by a HDHP in 2019 and then put that I will withdraw all of the contributions by July 2020 (I have already sent the form in to my HSA custodian). This ended up decreasing my refund, which I assume is because it changed the HSA contributions to taxable income. A form 8889 was then generated and I was asked to edit it at the end of the tax return. Upon editing it as the software requested, I noted that I had a family HDHP in Dec of 2019. This then caused my refund to go back up again. It is not clear to me whether I should be paying taxes on this money on the 2019 return or the 2020 return (the year that I will receive the check for the excess funds that were invested in 2019). On form 8889, should I try to continue with leaving the health care coverage question without a selection?

I spoke to a turbotax representative in the first place and he ended up pointing me to this message board, so any help would be appreciated.

Thanks!

[BillM223]

"I had an HSA opened this year" which year are you talking about, 2019 or 2020? (this is a perpetual problem in the tax year...what is the meaning of "this" year, the current calendar year or the current tax year?)

First, were you covered by an HDHP policy in December 1, 2019, and your spouse not covered by the FSA at the same time (the FSA, of course, also covers you)?

If "yes" then you have the benefit of the last-month rule. This rule states that IF you had valid HDHP coverage on December 1st of the year (i.e., the last month), then you can use the full annual HSA contribution limit, no matter how many or few months you actually had coverage. The only catch is that you have to stay under HDHP coverage for the next year or be penalized.

It sounds like you indicated in the HSA interview that you had HDHP coverage on December 1st, so any HSA contribution that you had made was no valid, which would (likely) remove the excess contribution.

"A form 8889 was then generated and I was asked to edit it at the end of the tax return. Upon editing it as the software requested..."

Where was this, in the Federal Review? We really would prefer that you not edit the 8889 in the Review, except in certain unavoidable situations.

What was the exact message that you got in the Review?

Listen, you know that if you had HDHP coverage on December 1st and if spouse were not under the FSA at the same time, then your HSA contributions would be allowed.

But since you have evidently triggered excess contribution processing, we may have an issue with TurboTax remembering the amount of the excess that you agreed to withdraw (going through the interview again doesn't reset this to zero).

So if you think that you did qualify under the last-month rule, then please do the following to reset all your HSA data and start over again.

**

1. make a copy of your W-2(s) (if you don't have the paper copies)

2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen

*** Desktop***

3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.

*** Online ***

3. go to Tax Tools (on the left), and navigate to Tools->Delete a form

4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one)

5. go back and re-add your W-2(s), preferably adding them manually

6. go back and redo the entire HSA interview.

**

The next thing is how to handle the the withdrawal of excess contributions that you probably didn't want to do. 

If you go through the steps above and re-enter your HSA data and find that you do not have any excess HSA contributions, then contact your HSA custodian and ask them to consider that withdrawal a "mistaken distribution". You will have to send them the money back, but that will stop your distribution from being declared as a non-qualified distribution subject to a 20% penalty.

Note that your custodian doesn't have to agree to this, so be very nice to them when you ask.

If I understand your situation, you will get back to where you wanted to be: valid HSA contributions, and tax benefits.

If you have any questions or if I misunderstood something, please come back and tell me.

[swfyau83]

Thank you for the detailed reply.

Sorry for not indicating the exact dates. 

I started under the HDHP on July 1, 2019. My wife's FSA was open until Dec 31st, 2019. So I don't think we benefit from the last month rule, since, we had valid HDHP coverage on December 1st of 2019 and my wife was also covered by the FSA at the same time.

I came upon the 8889 form during the federal review. Editing of the 8889 form came up on my To-do list as "needs review." 

There are three questions in the 8889 form that I am being asked to answer:

1. Indicate the type of coverage held under a HDHP during 2019 - No entry, self-only, or family

2. December plan type - No entry, none/covered by Medicare, Self-only, or family

3. Line 12B - Excess withdrawn after the end of the year - (currently listed as the amount I asked for as an excess contribution withdrawal, but turbotax says that there should be no excess employer contribution). 

My true situation would be:

1. Family

2. Family

3. Excess contribution amount that I am withdrawing in 2020 due to my not qualifying for an HSA in 2019 due to my wife's FSA.

If I leave No entry for either of the first two questions, it says that I need to come back to it later. If I leave the amount in line 12B, it says that I need to come back to it later. 

I had originally done everything that is recommended in the first answer on this message thread, and seemed to work out fine, until federal review when it is making me edit the form 8889 to file.