Overlapping FSA and HSA accounts - Any issue if all spent in same year?

Opus456

My wife is a teacher and her plan year starts 9/1/2024. Our insurance is with my employer and has a 1/1/2025 start date. We've always done FSA to the max because we always need that much plus more for medical costs. When I got my insurance package from my employer this year they have gone to a HSA only plan. I signed up with an HSA account thinking that my wife's employer would just let her get out of the FSA account. That is not the case, they refuse to do anything. So if I contribute to my HSA and we still have the FSA but spend everything on medical before the end of 2025, is there a penalty? I've read someplaces that it is taxed (penalized) on the excess that is still in the HSA account, which in my case would be zero.

My wife's employer told her that if she spends everything in the FSA by 12/31/2024, that it would count as not having the FSA for 2025. That didn't seem right to me since they would still be taking deductions thru 8/2025 from her paycheck.

KristineS

Hi Opus456,

Thanks for writing in with your questions.

FSAs, or Flexible Savings Accounts, are generally considered a 'use it or lose it' plan. However, if the plan allows, an employee may carryover unused amounts into the next year. If a carryover is allowed, there's a maximum amount. In 2024, the maximum amount that can be carried over into 2025 is $640. But again, the plan has to allow it. Be sure you know that detail of your wife's FSA plan. If the plan allows a carryover, there isn't a penalty. If the plan doesn't allow a carryover, the penalty would be the forfeiture of whatever is left in the plan after 12.31.24.

She does not have to participate in the FSA at work, they're voluntary. Each year at the beginning of the year employees have to indicate in advance how much in total should be contributed to the FSA plan for employers to deduct that from payroll. That planning might be beginning now for your wife at the end of 2024. It sounds like she might contribute $0 in 2025. And carryover from 2024 into 2025 if allowed, does not mean your wife is participating in a 2025 FSA plan.

An HSA is through a High Deductible Healthcare Plan offered by your employer as Single plan or Family plan.

One point of clarification on this however. I strongly recommend you double check with your employer on your ability to have an HSA if your wife continues her FSA. Typically that's not allowed except under limited circumstances. I recommend you check with your HSA provider directly. There's a rule that states:

"An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses can’t generally make contributions to an HSA.

"However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements:
• Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible."

You can also look at this information in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans which covers HSA, FSA, and other related plans.

Opus456

Thanks for the reply. My issue is we are on different time periods. Her plan starts 9/1/2024 so it will not end until 8/31/2025. My plan starts 1/1/2025 and I'm being forced to move to HDHP, they are not offering anything else due to high costs. My wife's employer is refusing to let her drop out of FSA because they say they have already funded her account and there is no way to unfund it. Not sure what they do if she were to quit because I would assume they would get back their money then. Anyway, they also told her that if she spends everything in the account by 12/31/2024 that we could have the HSA at my company with no issues. My company doesn't agree with that. I've already elected HSA at my company thinking her company would let her out of the FSA. My company said they would let me out of an FSA if it was my wife being forced to a HSA. From what I've gathered in my research there is a 6% penalty for having a HSA and FSA at the same time but not sure what amount is used to calculate the 6% penalty. I read one place it is the balance of HSA at the end of the year that was there during the period of the overlap and the penalty is accessed each year the balance remains. We hit the 8000 out of pocket max each year which is more than my total contribution so expect the HSA to have a 0 balance at the end of 2025.

KristineS

Hi Opus456,

It feels like you've unintentionally been placed between a rock and a hard spot. I'm sorry this is happening between the coordination of benefits. We may be somewhat limited in how we can guide you, and I appreciate you researching what you can.

Each company controls it's own benefits offered. And the IRS has specific rules about FSA and HSA participation.

There is a small amount of crossover guidance with HSA and FSAs in IRS Publication 969. On page 5 of 23 it states:

"However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements: Limited-purpose health FSA or HRA" (emphasis added).

Do you or your wife know she has a limited-purpose health FSA?

"These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid with out having to satisfy the deductible."

The publication goes on to mention post-deductible health FSAs and grace period. "Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero."

First, when you speak to your company, are you speaking to the Benefits/HR person? In theory this should be their area of expertise.

Second, have you called the HSA plan administrator directly and asked to speak with or request a callback from a manager? Someone with more experience and knowledge that could help follow the rules as set by the IRS, as well as what the company allows.

In my opinion you need to speak with an HSA/FSA expert. I'd start with your company's plan administrator (Optum Bank, HSA Bank, etc.) for your HSA. They're the expert.

Opus456

I found out what I suspected all along. I basically got **** since my wife's employer refuses to let her out of the FSA. I will just have to put aside what I think we will need and I just won't get a tax benefit. Once my wife's FSA ends in August 2025, I can start contributing to my HSA at work up to 1/4 of the 2025 limit.