HSA Compliance Webinar Questions and Answers

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://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://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://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.

12 thoughts on “HSA Compliance Webinar Questions and Answers

  1. If you had an FSA with an employer for 3 months, then terminated employment with that company to go to a new firm with an HSA offered, can you sign-up for the HSA at the new firm since you no longer have an FSA with the termed employer?

    • Hello,

      Yes, as long as your FSA is expired and you no longer have any benefits from it, you are eligible to open an HSA for the remainder of the year. You just cannot have both at the same time so make sure the FSA is completely expired!

      I hope that helps.

      Paige

  2. Fantastic article/blog. A follow-up question. My FSA plan year ends 6/30/2014 and I will not be enrolling in the FSA on 7/1/2014. My new benefit plan as of 7/1/2014 is a qualified high deductible health plan. If I still have money in my FSA in July and use that money up by the end of July (get the claims processed for dates of service prior to 7/1/2014), can I open the HSA on August 1?

    • Diane,

      Thanks for contacting us. For non-calendar year plans, the FSA would have to be discontinued for the new plan year or be modified to a limited purpose plan. If there is a grace period for your FSA program, you could not establish or contribute to a new HSA until the first day of the next month following the last day of the grace period. For example, grace periods are typically 3 or so months long, so you would not be eligible to establish and contribute to your HSA until the first day of the following month after the grace period is over, which would be October 1 in your case if you were to have a 3 month grace period.

      Here is some IRS Publication proof of my statements above:

      Q-59. Can an employer permit employees to elect an HSA mid-year if offered as a new benefit under the employer’s cafeteria plan?
      A-59. Yes, if the election for the HSA is made on a prospective basis. However, the HSA election does not permit a change or revocation of any other coverage under the cafeteria plan unless the change is permitted by Treas. Reg. § 1.125-4. Thus, while an HSA may be offered to and elected by an employee mid-year, the employee may have other coverage under the cafeteria plan that cannot be changed, (e.g., coverage under a health FSA), which may prevent the employee from being an eligible individual. See Rev. Rul. 2004-45.

      The rest of that publication can be found here: http://www.irs.gov/irb/2004-33_IRB/ar08.html

      Additionally, if you have a zero balance before the end of the plan year, then you are eligible the 1st day of the month of the next plan year even if you have a grace period on the FSA.
      http://www.irs.gov/irb/2007-10_IRB/ar10.html

      I hope that helps!

      Paige

  3. If I terminated employment with my prior employer on May 1st and have exhausted all $1,200 of general purpose FSA funds (calendar year FSA plan) prior to termination. Can I then open an HSA account with my new employer effective June 1st since I will have an HDHP June 1st? The moment I terminated employment with prior employer I was no longer eligible for submitting expenses incurred after May 1st. Or am I still ineligible because I could submit for expenses incurred prior to May 1st through the end of the calendar year?

    • Hi Jay,

      Thanks for contacting us. For non-calendar year plans, you are not able to establish or contribute to a new HSA until the first day of the next month when you are no longer on the FSA.

      Here is some IRS Publication proof of my statements above:

      Q-59. Can an employer permit employees to elect an HSA mid-year if offered as a new benefit under the employer’s cafeteria plan?
      A-59. Yes, if the election for the HSA is made on a prospective basis. However, the HSA election does not permit a change or revocation of any other coverage under the cafeteria plan unless the change is permitted by Treas. Reg. § 1.125-4. Thus, while an HSA may be offered to and elected by an employee mid-year, the employee may have other coverage under the cafeteria plan that cannot be changed, (e.g., coverage under a health FSA), which may prevent the employee from being an eligible individual. See Rev. Rul. 2004-45.

      The rest of that publication can be found here: http://www.irs.gov/irb/2004-33_IRB/ar08.html

      Additionally, if you have a zero balance before the end of the plan year, then you are eligible the 1st day of the month of the next plan year even if you have a grace period on the FSA.
      http://www.irs.gov/irb/2007-10_IRB/ar10.html

      I hope that helps!

      Paige

  4. Two semi-complicated situations below I’d like help with:

    What happens to newly married couples? My brother has an HDHP and HSA through his work as an individual, his fiancee has a PPO plan and an FSA through her work. They are getting married in July, how can that impact them?

    Second question is about 2 HSA accounts. My fiancee and I are getting married in September. As we are both single parents and each of ourselves and each of our respective children are on HDHP’s we are each contributing to the family limit in our individual HSA accounts. How will that impact us since we are getting married this year, are we going to have to pay taxes on anything over the family limit for 1 plan since we are joining families. We need to know if we have to adjust our limits since we are almost at the mid mark of the year.

    • Hi Autumn,

      Thanks for contacting us. Those are both pretty complicated situations but here is what would happen:

      For the first situation, your brother would have a pro-rated HSA contribution limit since he will only be eligible for part of the year. Once they are married, he is no longer eligible to make HSA contributions since his wife has an FSA that she would now be eligible to use on him. He will need to take his annual contribution limit (which I assume is $3,300 because I am also assuming he is on a self-only coverage plan) and divide it by 12 months and then multiply it the number of months he wasn’t married in 2014.

      That will give him his annual contribution limit for 2014. If he has already exceeded that amount, he will need to get in touch with his HSA custodian to see how he can fix it so that he is not penalized for having over-contributed.

      For your situation, it is a little bit trickier. It’s the same concept with a pro-rated amount but here is how you would calculate it:

      You would each calculate the pro-rated family limit for the months that you were each on the family coverage plan before you got married. For instance, you would take $6,550 and divide it by 12 and then multiply it by 8 (for the 8 months that you were on your family coverage plan.) This means you were each eligible to contribute $4,366.67 from January – August.

      Now when you get married in September, you will then have to share a pro-rated family limit and here is how you would calculate that:

      Together, your new limit would be $6,550 and so you would take that and divide it by 12 again and multiply it by 4 to get $2,183.33. The $2,183.33 is the “family limit” that you would have to share for the remainder of the year (September – December.) This means that you can slpit the $2,183.33 however you like between the two of you. So if you wanted to, one person’s 2014 limit could be $6,550 ($2,183.33 + $4,366.67) but that means the other spouse’s limit would be $4,366.67.

      I hope that makes sense and the examples aren’t confusing. Please let me know if you have further questions and I apologize for the delay in response time as I was doing some research.

      Paige

  5. My health insurance was through my husband’s employer at the beginning of this year (low deductible plan) and I set up a FSA account with my empolyer. In the middle of the year, my husband changed his job. His new employer offers HDHP with HSA. I am thinking to use FSA to only reimburse the medical expense with the earlier health plan ( low deductible plan) and HSA to reimburse the cost with HDHP. The FSA is under my name and the HSA will be under my husband’s name. I wonder if we are eligible for opening HSA? Will it be a problem when filing tax together? Thanks!

    Jenny

    • Hi Jenny,

      Thanks for contacting us. Unfortunately, if you or your spouse still has an FSA then you will not be able to open and contribute to an HSA at the same time. The IRS has strict rules on this because they consider it to be a double advantage since you can use both the FSA and HSA on your spouse’s expenses as well as your own. You will have to wait until your FSA is expired at the end of the year (with no grace period) before you can open and contribute to your HSA.

      I hope that answers your question!

      Paige

      • What if I have individual coverage and FSA (only for myself) through my employer and my husband take the individual HDHP with HSA from his employer? Will he be eligible for opening HSA?

        • Hello Jenny,

          We have found that in a typical situation, even if you have individual coverage with an FSA, you are usually still allowed to use your FSA to cover your spouse’s expenses. Whether or not you choose to cover their expenses is not the problem, it’s whether or not you are legally able to cover their expenses which makes them ineligible for the HSA.

          With that said, we have heard once or twice before that there is such a thing as an FSA that cannot be used on the spouse’s expenses but only the account holder. However, even if that is what you have, HSAs can be used on your spouse regardless so there would be nothing stopping your husband from opening an HSA and using it on your expenses as well. From what we have read in the IRS Publications, you cannot as a family unit have both an HSA and an FSA at the same time.

          I hope that clears it up for you!

          Paige

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