Newlyweds with an HSA and an FSA

[erippetoe]

I have a couple complicated tax questions related to HSAs and FSAs for a newly married couple. We have not yet changed the situation since we got married, but I started to realize that we might have to do something to ensure there are no tax impacts. From my internet research, married couples are not allowed to have both an FSA and an HSA, so I'm trying to figure out how to fix this both for this year and for future years

Background/Current Situation:

We got married on March 29, 2022.

Spouse 1 has/had an HSA under a Family HDHP which covers himself and his kids from a previous marriage. He has deposited $4000 manually (not through his paycheck). 

Spouse 2 has/had an FSA under her Family PPO which covers herself and her kids from a previous marriage. She has deposited and used $1500.

Question 1

For the current/2022 tax year, do we (or can we) need to do anything to ensure we're not penalized for having both an FSA and HSA? For example, do (or can) I need to remove that $4000 from the HSA? (It was a manual deposit from my savings account, not salary), etc.?

Question 2

For the long run, we prefer the HSA because of it's long-term tax/investing benefits. Can Spouse 2 drop the FSA and Spouse 1 continue to contribute to his HSA? That said, Spouse 2's kids are still younger and she likes the lower deductible PPO. Do we need to get on to 1 healthcare plan or can we keep them separate?

Thank you in advance!

[NCperson]

@Opus 17 has a well written write-up on this same situation in the last week.  I am having trouble finding it, but hopefully he'll see this and respond 

Note that you can only have the HSA if you are on high deductible medical insurance plan.  You can't "have your cake and eat it too" (i.e. HSA and a low deductible medical insurance plan) . "High deductible" is defined by the government. 

[tagteam · Accepted solution]

I believe it is the thread at the link below.

Re: Family HSA after marriage when fiancée has a FSA account (intuit.com)

[NCperson]

@tagteam - that's the one! 

[Opus 17 · Accepted solution]

With regard to question 1:

Because the FSA can be used to pay for medical expenses for a spouse, you are considered “covered” by the FSA as of March 29.  Eligibility to contribute to an FSA is determined on the first of each month, so you were eligible for three months and ineligible for nine months. Your maximum contributions for 2022 are $7300 divided by 12×3 months equals $1825. If you contributed $4000, you need to remove $2175.  You must also remove any earnings attributed to that $2175. Contact the HSA Bank and ask for a “return of excess contributions“. They will know to return the excess contribution and any earnings. If there are earnings, they will be reported as taxable income on your 2022 tax return.

regarding question 2:

now that you are married, all of the children are “yours”, and all of the children are “your spouse’s“.  If you don’t want to have one spouse cover the entire family with a family plan, then I think you will find that it will be cheaper to have one spouse cover the all children with a family insurance plan (self+children) and the other spouse have a single plan (self only).  Having both spouses purchase a spouse+children policy covering different children will likely be the most expensive option for insurance premiums.

Then, if you are enrolled in an HDHP plan that is eligible for HSA contributions, you can make HSA contributions even if your spouse is enrolled in a different kind of insurance, as long as you are not covered as a secondary insured under your spouse’s insurance policy or covered by their FSA.  If you are enrolled in a self-only plan, you would be able to make contributions up to the self-only limit, and if you are enrolled in a self+children policy (a family policy) you could make contributions up the family policy limit.  (The 2023 contribution limits have not been announced yet.). You can contribute up to the family limit if you are enrolled in a family policy even if your spouse is not.

Incidentally, marriage is a “qualifying event” that allows you to change your insurance options in the middle of the year without waiting for the open enrollment period. You normally have 60 days, so you have unfortunately missed your change window.  Your spouse could have canceled the FSA, and you probably could have combined the children under one family policy to save money. Since you seem to have missed the qualifying event window, you will have to wait for the next open enrollment period, but this information might help someone else.

[erippetoe]

Thank you - this is exactly what I was looking for! I appreciate it!

[Opus 17]

@erippetoe 

Lastly, just so you know, if you or your spouse can make HSA contributions via payroll deduction, you will save an extra 7% on taxes, since the HSA contributions are exempt from social security tax as well as income tax.