Yes, a Spouse's General Health FSA Affects Your HSA Eligibility

Understanding all your coverage is critical to ensuring that you remain eligible to fund your Health Savings Account.

The issue comes up again and again. Rarely does a month go by when I'm not asked by a benefits advisor or a company's benefits specialist about a problem that someone just discovered. One spouse is enrolled in the company's Health Savings Account program and is making his own and receiving the employer's contributions to the account. The worker's spouse is enrolled in her company general Health FSA program to reimburse some of her qualified expenses tax-free.

I'm asked, "What can we do?" The answer I give is always discouraging. Unless both spouses have the same anniversary dates and the compliance issue is caught in time to cancel the Health FSA participation, they don't have a path to salvaging Health Savings Account eligibility that plan year.

Let's look at why the Health Savings Account-general Health FSA combination is disqualifying and why it can't be fixed easily (without rather drastic changes in employment status).

Eligibility to Fund a Health Savings Account

To become eligible to open and fund a Health Savings Account, you must meet three requirements:

1.     You must be covered on an HSA-qualified medical plan.

2.     You can't be covered by any plan that's disqualifying.

3.     You can't qualify as another taxpayer's tax dependent.

The first and third requirements are usually straightforward. The second is a little trickier. It's not unusual to also be enrolled in dental, vision, and disability insurance, voluntary plans (like accident, hospital, medical-reimbursement accounts (like a Health FSA or Health Reimbursement Arrangement), and critical-illness plans that pay a fixed amount per covered event).

Most of these coverages don't affect your Health Savings Account eligibility because they reimburse non-medical expenses (like dental and vision) or pay a fixed amount rather than reimburse claims (like voluntary coverage). But Health FSAs and HRAs can create a compliance problem, depending on their design.

General Health FSA

A general (or general-purpose) Health FSA allows you to elect to receive part of your income in the form of pre-tax contributions to an account from which you can withdraw funds tax-free for qualified medical, dental, and vision expenses. You make a binding election before the beginning of the plan year and remain covered, even if you spend your full election before the end of the year.

A Health FSA falls under medical-plan rules in the federal tax code. You may think of a Health FSA as a reimbursement account that you fund to pay your out-of-pocket expenses. But federal tax law sees a Health FSA as a medical plan for which you pay premiums (your payroll deductions) and receive reimbursement for qualified services (your reimbursements).

Under that same federal tax law, a Health FSA automatically covers the participating employee, her spouse, her tax dependents, and her children to age 26. These family members don't have to be covered on her major medical plan. They are covered on the Health FSA by their relationship to the employee (unless her company has narrowed the definition of eligible family members, which is rare).

Example: Marvinia covers herself on her company's medical plan. Her husband, Marcelino, is covered on his company's medical plan and participates in the company's general Health FSA, electing $2,100 in 2024 to cover his anticipated restorative dental expenses. His Health FSA automatically covers Marvinia because she is his spouse. She's covered, even if she never files a reimbursement claim or uses the Health FSA debit card to reimburse a qualified item or service.

The Compliance Conflict

In the example above, Marvinia is covered by two plans: her HSA-qualified plan and her husband's general Health FSA (by virtue of her being married to him, which triggers her coverage under federal tax law). Her husband's Health FSA provides first dollar (no deductible) reimbursement of all qualified medical, dental, and vision expenses. This general Health FSA is not HSA-qualified because Marvinia can reimburse her qualified medical expenses before satisfying her deductible of $1,600 or more (depending on her employer's plan design).

Marvinia remains covered on her husband's general Health FSA, even if the two of them spend the full election before the end of the year. The plan year is 12 months long, and their coverage doesn't end just because they've spent a full year's worth of payroll deductions ahead of schedule.

She can't disenroll from his Health FSA once she discovers that it disqualifies her from continuing to fund her Health Savings Account.

Her husband can't change his participation (stop or start participating, or alter his election up or down) unless he experiences a qualifying event, such as a birth, marriage, divorce, or adoption. But Health Savings Account eligibility isn't a qualifying event to terminate participation, nor can he disenroll Marvinia and remain covered himself.

The one option that is available is his losing his eligibility to participate in this employee benefit, for example by leaving his job or shifting to part-time status.

Permitted Health FSA Design

Companies that offer a Health Savings Account program and a Health FSA often sponsor a Limited-Purpose Health FSA. This plan limits reimbursement to qualified dental and vision expenses, like orthodontics, dental crowns, prescription glasses, contact lenses and solution, and vision-correction surgery. In some cases, the list of qualified expenses expands to include qualified medical expenses as well, once the employee attests that she has met the statutory minimum annual deductible on her HSA-qualified medical plan. That minimum is $1,600 for self-only coverage and $3,200 for a family plan in 2024.

Example: Tiago is enrolled in his company's HSA-qualified medical plan with a $4,000 family deductible and participates in his company's Limited-Purpose Health FSA program with the twist listed above. He satisfies the $4,000 medical deductible with pre-op services, arthroscopic knee surgery, and post-surgery physical therapy. When he attests that he's met $3,400 of his deductible, the list of qualified expenses covered by his Limited-Purpose Health FSA expands to include qualified medical services. He can reimburse the final $800 of his medical deductible, plus any other qualified medical, dental, and vision services from his remaining Limited-Purpose Health FSA balance.

Participation in a Limited-Purpose Health FSA is not disqualifying because coverage for dental and vision isn't disqualifying, as noted earlier. And the design expanding the list of qualified expenses isn't disqualifying because the Limited-Purpose Health FSA meets the definition of an HSA-qualified medical plan if it imposes the statutory minimum annual deductible on reimbursement of qualified medical services.

The Caveat

Employers who sponsor a Health Savings Account program should, and usually do, understand the implications of a Health FSA on Health Savings Account eligibility. They should, and usually do, make sure that HSA-eligible employees don't enroll in a general Health FSA (disqualifying). They have the option of adding a Limited-Purpose Health FSA for Health Savings Account plan participants who want to reduce their taxable income further, retain rather than spend their account balances for dental and vision services, or leverage the Health FSA provision that allows participants to spend their entire election early in the year.

But a spouse's employer doesn't provide this opportunity or level of protection. The spouse's company doesn't know that a worker who waives medical coverage has a spouse who's funding a Health Savings Account. And the spouse's company won't offer a Limited-Purpose Health FSA unless it also sponsors a Health Savings Account program for its workers.

Kids, Too

This article focuses on spouses. But children under age 26 can fall into this compliance trap as well. If they no longer qualify as a parent's tax dependent, enroll in an HSA-qualified plan, and have no disqualifying coverage, they can open and fund their own Health Savings Account. But if a parent, even one who doesn't participate in a Health Savings Account program at work, enrolls in her company's general Health FSA, that child is (usually unknowingly) disqualified from funding a Health Savings Account.

Example: Ysadora recently graduated from college and accepted her first job thousands of miles from her parents. She enrolls in her company's Health Savings Account program. She has no idea that her father participates in his company's general Health FSA program to pay for his prescription drugs and Ysadora's mother's upcoming vision-correction surgery. Ysadora, whether she knows it or not, is disqualified from opening and funding a Health Savings Account. She remains covered on the HSA-qualified plan (losing eligibility to fund a Health Savings Account isn't a qualifying event to change coverage), but she can't accept an employer deposit or make pre-tax payroll or personal contributions to a Health Savings Account.

The Bottom Line

Health Savings Account owners bear all compliance responsibility. They alone are held accountable for knowing whether they're eligible, contributing no more than their maximum, and determining whether a distribution is for qualified expenses. Employers often provide direction - though they don't assume compliance responsibility - when the couple purchase all benefits through one company. But when couples choose some employee benefits from each company (or children make benefits choices independent of their parents' coverage), they must understand which coverage is disqualifying and communicate clearly with each other before finalizing their benefits package.

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HSA Monday Mythbuster is published every other week, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.