Can an employee be eligible for the HSA if his spouse has an FSA through her employer? What about a working spouse’s FSA that isn’t known to the primary employer group’s HSA?
That is a complex question. There are Flexible Spending Arrangements (FSA) for various purposes. The most common are for “general purpose” and “limited purpose” healthcare, commuter, and childcare. The “limited purpose” FSAs specifically cover vision, dental and preventive care but exclude other healthcare expenses that would disqualify HSA eligibility. So the answer depends on the kind of FSA it is. Only the “general purpose” healthcare FSA would disqualify an individual or their spouse from HSA eligibility, so for purposes of this response let’s assume that the spouse has a general purpose FSA.
The next question to ask is whether or not the spouse’s FSA can be used for the employee’s expenses. The employee only becomes HSA ineligible if the spouse’s general purpose FSA could be used to cover the employee’s expenses. If the spouse has individual coverage and his FSA only covers himself, the spouse’s general purpose HSA would not make the employee HSA-ineligible.
Employers do not have responsibility under IRS rules for tracking whether an employee’s spouse has an FSA with the spouse’s employer, but it can become an administrative headache and a very negative experience for employer and employee when this is discovered later (hopefully not through an audit!) and the employee and possibly the employer become responsible for penalties and taxes on ineligible contributions. Making sure employees know these rules prior to opening the HSA through repeated communication is recommended. Even just asking if the employee’s spouse has an FSA can alert an employer as to which employees they may need to more carefully screen.
More information can be found in IRS Notice 2008-59, Q&A 8.
As long as the FSA is depleted at the end of the calendar year, can the member enroll and contribute to the HSA?
If the FSA benefit year is same as the calendar year, and the employee’s balance is depleted by December 31 and their FSA funds therefore don’t carry into a grace period, the employee can open the HSA and receive funds on January 1. Additionally, if the FSA plan year is non-calendar year, (ending June 30, for example), even if the employee exhausts all of the FSA funds before the plan year-end, they remain HSA-ineligible until the July 1.
To confirm, an employee who moved to a CDHP plan mid year, cannot open or receive contributions to an HSA account if FSA money is still available. Correct?
Correct; the employee is still is considered covered by the FSA until the end of the plan year (even if the FSA balance is zero) and they are not eligible to open or to contribute to the HSA. They can continue to use the FSA for their expenses on the their HDHP, but need to wait until the plan year ends before contributing to the HSA.
For more about how HSAs work or conflict with FSAs, see our blog: http://www.tangohealth.com/posts/how-do-i-keep-ineligible-employees-from-opening-hsas/
What do you do about states that do not recognize tax-relief for HSAs?
First, it is important to understand that the federal income tax deduction for HSA contributions still does apply in these states. The difference is that there is no deduction for HSA contributions for state income tax calculations. As an employer, if you are withholding state income tax in these states (Alabama, California and New Jersey at present), you should calculate the state withholding without allowing any deductions for employee HSA contributions through payroll. Employees should get the correct information on their W-2 and tax software and tax forms for those states will provide filing guidance.
We have an employee who is currently in a Parent-Child HMO plan and also has a domestic partner. Today she pays two premiums. If she chooses the HSA plan will she be responsible for two HSAs – one for her and her child and another for the domestic partner? Will she have to meet two deductibles (a single and a family) or will they be considered one family?
This question mixes two issues. It appears that the employee has two separate health plans and two separate premiums. Assuming the second plan only covers the domestic partner, then the domestic partner’s expenses will be the only ones that apply to that plan’s deductible, and the parent and child expenses will apply to the other one. With respect to the HSA, the employee is eligible to open the HSA if the parent-child plan is HSA qualified. Assuming the domestic partner is not a tax dependent of the employee, then the partner can open his or her own HSA assuming their plan is HSA-qualified. The domestic partner would need to pay their own expenses out of their own HSA (although there is no restriction on who can contribute to which account). This rule is the same for adult children that are not dependents. More details on this subject are available on our blog: http://www.tangohealth.com/blog/posts/domestic-partners/
If the child is a dependent of the employee, the employee can use their HSA money to pay for the child’s eligible medical expenses, even if the child is not covered by the employee’s insurance plan.
An employee never opened their HSA account while an active employee. She then contacted us as a termed employee, requesting the HSA contributions that we would have funded if she had opened the account while employed. What do I do in this case? Do I need to fund the money if she now has an HSA account?
It depends on whether or not the contributions are offered via a Section 125 plan or not. If so, an employer only needs to fund if failing to do so would violate Section 125 non-discrimination rules, which is not likely. If the contributions are offered outside of a Section 125 plan, and the employer is contributing under the “pay-as-you-go” or “look-back” method, the answer is yes, the employer would need to fund the account for the eligible months according to their contribution scheme in order to meet comparability requirements. Your plan administrator should be able to help you make the right decision.
See Treasury Regulation 54.4980G-4 for more information.
If one of my dependents is enrolled in a government health plan and claimed on my taxes can I enroll in an HSA? Can I use the funds for me and not for the dependent enrolled in the government health plan?
If you are covered under a qualified HDHP and the government health plan does not cover you, you can enroll in the HSA, and you may use the funds for any qualifying expenses, even for your tax dependent.
You are saying I can use my HSA dollars to pay for my dependent’s medical expenses (the dependent that is enrolled in a government health plan)?
As long as the individual is your tax dependent (or your divorced spouse claims the child as a dependent on their taxes) the answer is yes, you may use your HSA dollars for the dependent’s qualifying medical, dental or vision expenses.
Does the employer incur penalty fees if an employee enrolls and is not eligible?
If no funds are placed in the account, there is no tax penalty. If the employer has made contributions for an ineligible employee, the employer may correct the situation by requesting that the bank return the funds without needing the account holder’s permission. Alternatively, the employer could treat the contribution as normal wages and tax them accordingly. The employee is also responsible for correcting the situation when they file their taxes, which can be an employee hassle and dissatisfier. There also may be administrative fees charged by the bank to reverse the transactions.
For more about how to keep ineligible employees from opening HSAs, visit our blog: http://www.tangohealth.com/posts/how-do-i-keep-ineligible-employees-from-opening-hsas/
Could you please repeat the comment you made regarding 2% shareholders being an owner, not an employee, and therefore ineligible for a HSA?
Let’s be clear on this. Self-employed individuals, partners in a partnership, sole proprietors and 2% shareholders of an S corporation, will be eligible to open and contribute to an HSA if they meet the usual requirements. What they cannot do is participate in the company’s cafeteria plan, which means they can’t make PRE-TAX payroll deduction contributions to their HSAs. However, they can contribute to their HSA with after-tax funds, and still take the income tax deduction as an adjustment to their gross income. For technical details, you can check out IRS Notice 2005-8.
Does Tango provide services to assist the employer with Section 125 plan enrollment and compliance? If not, where does this responsibility generally fall – TPA, broker, etc?
Yes, Tango Health is committed to assisting their clients with HSA compliance during enrollment as well as throughout the life of the program both inside and outside 125 plans. Services for general plan compliance, such as plan documentation and nondiscrimination testing, will normally be provided by the plan administrator. Your broker or benefits consultant should be able to guide you to the right resources.
Does there have to be a “qualified life event change” to enroll in an HSA-qualified plan outside of an Open Enrollment period?
That depends on your plan design, and not on the HSA rules. Your plan administrator and plan documents should provide the guidance that you need.
Our company provides employer contributions to employees’ accounts, but several employees did not open their account and then became ineligible. Can the employees still open an HSA and receive the funds?
Yes, the employee can still open an HSA and accept contributions retroactively from their employer as long as the contribution applies to the same tax year, which means the account must be open and the contribution received by the normal tax filing time for that year, usually the following April 15. They can only accept the prorated amount of contributions for the months they were eligible during that year.
What happens if a company is holding payroll deductions for an employee from the previous year and the April 15th deadline passes. Can they still contribute the funds?
If the delay occurred because the employee never opened the account, the answer is no. Once the custodians close the tax year, the funds can’t be applied to the previous year. The employer needs to return the those funds to the employee after calculating the appropriate payroll and withholding taxes. They also need to prepare a corrected W-2 form for the employee and the employee may need to amend their return. However, if the funds were misdirected due to an error, and but for the error the funds would have been in the account, the employer should be able to treat them as if they were contributed during the prior year. In either case, you should consult with your own tax professionals or counsel to make sure this is done correctly.
If an employer contributes to an HSA for several months, and then discovers that the employee was never eligible, can the employer recover their funds or do they forfeit them?
They can recover the funds. Since the employee was never eligible to establish the HSA, the non-forfeitability rule does not apply. The employer can work directly with the custodian to recover the funds from the account and usually no permission from the account holder is needed.
What are the advantages and disadvantages with front-loading the employer contribution at the start of the plan year?
While contributing early helps give employees a head start in paying for expenses, employers risk contributing more to the account than their contribution limit allows. In most cases, employees will end up qualifying for the full annual IRS contribution maximum, but if an employee is terminated mid-year, changes status (such as going from a family plan to a single plan), or suddenly becomes ineligible, the employee will have to pay taxes and a penalty on any over-contributed amount.