Tag: HSA

Compliance Trap: HSA & Spouse’s FSA

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, eligibility, FSA, HSA9 Comments

Despite an employer’s best intentions, many entities don’t have processes in place to ensure that they are compliant with the IRS’s HSA rules. Others are not even aware of the compliance risks and find themselves in violation, which creates risks for both the company and their employees.

There are four main health savings account (HSA) compliance “traps” that I regularly find myself providing guidance on regarding HSAs, which fall into 4 main categories:

  • Disqualifying coverage – eligibility violations
  • Contribution issues – excess or ineligible contributions, failure to open an account
  • Cafeteria Plan Issues
  • Mistaken Contributions

All are equally problematic, however, for many employers open enrollment season is upon them and the one top of mind is disqualifying coverage, or what makes one ineligible for an HSA account.

According to the IRS, to be an eligible individual and qualify for an HSA, an individual must meet the following requirements:

  • Must be covered under an HDHP on the first day of the month
  • Cannot have disqualifying health coverage
  • Cannot be enrolled in Medicare
  • Cannot be claimed as a dependent on someone else’s tax return for the year

One of the most overlooked disqualifying coverages is a health flexible spending account (FSA) or a spouse’s health FSA (unless it is limited purpose or post-deductible).

The most common mistake I come across is when both spouses enroll in their own employer’s sponsored health coverage and one spouse elects a non-high deductible health plan (HDHP) plan with a general purpose health FSA and the other elects an HDHP plan and makes HSA contributions. Under the IRS tax rules, the health FSA could be used to reimburse qualified medical expenses on the employee, spouse or all dependents claimed on the employee’s tax return, therefore it is considered “disqualifying health coverage’ and it disrupts HSA eligibility. I often here, “but my spouse doesn’t spend their FSA $ on me”….that doesn’t matter. The FSA could be spent on the spouse, therefore, it disrupts HSA eligibility

For example:

  • Marcy and Charlie are married, Marcy is a full-time employee at Peanut’s Place and Scott is a full-time employee at Snoopy Hotel.
  • Marcy enrolls in single coverage PPO (e.g. non-HDHP) with Peanut’s Place and elects the health FSA.
  • Charlie enrolls in single coverage HDHP with Snoopy Hotel and wishes to enroll in the accompanying HSA but is ineligible. This is because Marcy has a health FSA (which is disqualifying coverage) and she is permitted to spend her health FSA dollars on her qualifying medical expenses, and those of her spouse and dependents.
  • Even if Marcy does not spend her health FSA dollars on Charlie, Charlie is still ineligible for Snoopy Hotel’s HSA.

It is important during open enrollment meetings that employers are providing education to employees and helping them be aware of this ‘trap’ so employees are enrolling in the health plan that works best for their situation and/or family.

This is Part 1 of HSA Compliance Traps. Be sure to follow my blog to learn about additional HSA Compliance Traps published later this year.




Health FSA & HSA in the same year?

On By Michelle Turner, MBA, CEBSIn Cafeteria plans, COBRA, FSA, HSA1 Comment

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Q: We just hired a new employee on 7/1 who told us he elected the maximum amount under his previous employer’s health FSA that started in January. We offer a HDHP with an HSA. Is he eligible to participate in an HSA? Or does he need to wait until next year? 

A:  If his health FSA terminated (i.e. he did not elect COBRA), he is eligible to participate in an HSA as of the first of the month after his FSA termination, assuming he’s otherwise eligible for the HSA.

There are 4 basic rules to Qualify for an HSA:

  • Covered under a high deductible health plan (HDHP), on the first day of the month.
  • Have no other health coverage except what is permitted under the regulations
  • Not enrolled in Medicare.
  • Cannot be claimed as a dependent on someone else’s tax return.

So if he meets these 4 requirements, he is eligible to open an HSA on the first of the month following the health FSA termination.

When an employee leaves a job during the course of the year, they are still entitled to the earmarked FSA amount for that year (assuming the eligible expenses incurred prior to termination and claims submitted timely), even if they spend more than has been taken out of their paycheck so far. Furthermore, they could contribute to a new employer’s FSA (or HSA) and have additional pre-tax dollars to spend. (The “FSA loophole” doesn’t work for HSAs because the HSAs are portable and the employee’s account even if they leave.) Likewise, an employee may work for two or more entirely different (i.e. unrelated) entities and contribute the maximum amount to both employer’s FSAs at the same time. The health FSA limit is per employee per employer’s health FSA plan.

So if the health FSA and the HSA don’t overlap, (i.e. the health FSA terminated when the employee left the previous employer) he can contribute to an HSA for the remaining months assuming he’s otherwise eligible (mentioned above). The amount he is eligible to contribute, is calculated in two ways (see Limit On Contributions):

  1. “general monthly contribution rule” – which is one-twelfth of the applicable maximum contribution limit for the year for each month of they year they are HSA eligible. (There are tax implications for “over contributing” when not eligible.)
  2. “last month rule” – which basically states an individual is treated as HSA-eligible for the entire calendar year for purposes of HSA contributions, if they are eligible on the first day of the last month of their tax year (which is Dec. 1 for most). However, to rely on this special rule, the individual must then remain eligible for the HSA through the next 12 months after the last month of their tax year. (i.e. 13 months total).

If he did elect COBRA, assuming no carry-over provision (not common for COBRA participants to be eligible for) or grace period (this is something many COBRA participants are eligible for), or if there is a grace period (or carryover) & he has a zero balance on the last day of the FSA plan year, then he would be eligible for an HSA as of the first day of the month after the health FSA plan year ends (assuming he’s otherwise eligible for the HSA).

Yes 65 & HSAs can go together!

On By Michelle Turner, MBA, CEBSIn HSALeave a comment

 

Turning 65 and gaining eligibility for Medicare doesn’t disqualify an employee from continuing to receive employer contributions or making their own contributions to an HSA. Only if one voluntarily enrolls in any part of Medicare would they then be disqualified. 

Likewise, enrollment in Medicare for most, is not automatic when they turn 65. Only those who have contributed 40 quarters into Medicare when they receive Social Security benefits are they automatically enrolled in Medicare Part A; or those on disability are automatically enrolled after their 25th disability payment from Social Security.

Employees wanting to work a few more years and delay retirement are able to continue to reap the triple tax advantage benefit of an HSA if they are otherwise an eligible individual.