Does Your Spouse's Health FSA Affect Your HSA Eligibility?

This column is an excerpt (Question 29) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.

Question: I’m enrolled in my employer’s HSA-qualified plan that covers my wife and me. I don’t participate in my company’s general Health FSA. My wife waived medical coverage through her employer but enrolled in her company’s general Health FSA through her employer. Am I eligible to contribute to my Health Savings Account?

 Answer: No. A general Health FSA is governed by many of the same rules that apply to medical plans. Under one applicable rule, the employee (subscriber), her spouse, her tax dependents, and her children to age 26 are all covered by the general Health FSA. It doesn’t matter whether these family members are enrolled in her medical coverage, or she waives enrollment in the medical plan. Nor can they choose to opt out of Health FSA coverage, as they can with a standard medical plan. These family members are entitled to reimburse their qualified expenses through her general Health FSA unless her employer has specifically excluded certain family members from the plan (which is quite rare).

Therefore, you’re covered by two plans. Your medical coverage through your employer is HSA-qualified. Your general Health FSA coverage through your wife’s employer isn’t qualified. You can’t open and fund a Health Savings Account during the time that you’re covered on your wife’s general Health FSA.

You can’t fix this problem. Your wife can’t discontinue her coverage in her employer’s general Health FSA so that you can become HSA-eligible because wanting to open a Health Savings Account is not a qualifying event to terminate Health FSA coverage. She can’t disenroll you from coverage under her general Health FSA. You can’t sign an affidavit promising not to seek reimbursement from your wife’s general Health FSA. And even when she exhausts her balance, her general Health FSA continues to cover you and the rest of the family through the end of the plan year.

The only practical solution is time – waiting for the end of her Health FSA plan year. If you meet all other Health Savings Account eligibility requirements, you can open and fund your account on the first day of the first month after the end of your wife’s Health FSA plan year. See Question 32 and Question 33 for more information on when her employer’s Health FSA year ends if the plan includes a grace period or carryover of unused funds.

A second, more drastic, solution is for your wife to leave her company. Since participation in a Health FSA is tied to employment, ending the employer-employee relationship terminates her enrollment in the Health FSA. She may be entitled to continue her Health FSA enrollment (only if she paid more in payroll deductions than she has received in reimbursement), but she can waive her COBRA rights to end her participation immediately.

IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (2021 edition), page 16:

 Qualified medical expenses.

 Qualified medical expenses are those incurred by the following persons.

• You and your spouse.

• All dependents you claim on your tax return.

• Any person you could have claimed as a dependent on your return except that:

a. The person filed a joint return,

b. The person had gross income of $4,300 or more, or

c. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's tax return.

• Your child under age 27 at the end of your tax year.

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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.

HSA Question of the Week is published every week, alternating every other Wednesday with HSA Wednesday Wisdom and every other Monday with HSA Monday Mythbuster.