A Guide for Married Couples

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are two of the most popular tax-advantaged ways to tackle healthcare costs.At first glance, they seem similar: both reduce taxable income and help pay for medical expenses.But for married couples with an HSA and FSA in the same household, they can be a bit like oil and water — they don’t always mix.  This article covers how each account works, along with the risks of accidental misuse, to help you make the best choice and avoid surprises down the road.Understanding Health Savings Accounts (HSAs) An HSA is a tax-exempt account you set up with a qualified trustee, like a bank or insurance company, to pay or reimburse specific medical expenses.

To contribute to an HSA, you must meet certain eligibility requirements: HDHP coverage: You must be covered under an HDHP on the first day of the month.No other health coverage: You can’t have additional health coverage, with a few specific exceptions outlined by the IRS.Not enrolled in Medicare: Enrollment in Medicare disqualifies you from contributing to an HSA.Dependent status: You can’t be claimed as a dependent on someone else’s tax return.

If you meet these requirements, you are eligible even if your spouse has non-HDHP family coverage, as long as it doesn’t cover you.Not that each eligible spouse must open a separate HSA.You can’t have a joint HSA.Is financial planning with SLP Wealth right for you? Looking for student loan aware financial planning custom tailored for professionals like you? Check out the discounts below for becoming a client of SLP Wealth (our SEC Registered Investment Advisory firm).

SLP Wealth, LLC (“SLP Wealth”) is a registered investment adviser registered with the United States Securities and Exchange Commission with headquarters in Durham, NC.HSA contribution rules for 2024 Eligible individuals can contribute to an HSA, with contributions allowed from various sources.For an employee’s HSA, both the employee and their employer (or both) may contribute within the same year.Self-employed or unemployed individuals can also make contributions to their own HSAs.

Family members or any other person may also contribute on behalf of an eligible individual.All HSA contributions must be made in cash.Contributions of stock or property aren’t allowed.In 2024, the most you can contribute if you have self-only HDHP coverage is $4,150, while those with family HDHP coverage can contribute up to $8,300.

If you or your spouse has family coverage, you’re both treated as having family coverage, and the total combined limit for 2024 is $8,300 — even if each of you has a separate family plan.Benefits of HSAs HSAs have several benefits:  Tax deduction: You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).Employer contributions: You don’t include employer contributions (including contributions made through a cafeteria plan) in your gross income.Rollover flexibility: You can rollover the funds in your account until you use them, with no annual “use-it-or-lose-it” requirement.

Tax-free growth: The interest or other earnings you earn on the HSA account grow tax-free.Tax-free distributions: Withdrawals for qualified medical expenses are tax-free.Portability: Your HSA is “portable,” meaning it stays with you if you change employers or leave the workforce.Related: 4 Ways HSAs Help Borrowers on Income-Driven Repayment Win Big Understanding Flexible Spending Accounts (FSAs) A health FSA allows you to set aside pre-tax income to cover eligible medical expenses.

FSAs are usually funded through voluntary salary reduction agreements with the employer.Employment or federal income taxes aren’t deducted from your contribution, and the employer may also contribute to the account.FSA benefits that matter FSAs offer several advantages, such as: Employer contributions: Contributions made by your employer can be excluded from your gross income.Tax-free contributions: No employment or federal income taxes are deducted from your FSA contributions.

Tax-free reimbursements: Reimbursements are tax-free when used for qualified medical expenses.Immediate availability: You can use FSA funds to pay for eligible expenses at the start of the plan year, even if your account isn’t fully funded yet.Related: How To Use an FSA to Lower AGI: A Little-Known Student Loan Strategy Key FSA rules and limits FSAs are employer-established benefit plans, often offered alongside other benefits as part of a cafeteria plan.Employers have flexibility in designing these plans, but you’re not eligible for an FSA if you’re self-employed.

You contribute to your FSA by choosing an amount to be voluntarily withheld from your pay by your employer.This is sometimes called a “salary reduction agreement.” It’s done on a pre-tax basis, which lowers your taxable income.Employers may also contribute to your FSA, though contributions for long-term care insurance must be counted as income.At the beginning of the plan year, you decide how much to contribute, and your employer deducts that amount periodically throughout the year (generally, every payday).

You can change or revoke your election only if specifically allowed by law and the plan.For 2024, the most you can contribute to a health FSA is $3,200, though this may be a lower amount, depending on the plan).This amount is indexed for inflation and may change from year to year.Related: How Dependent Care FSAs Can Reduce Your Taxes The use-it-or-lose-it challenge FSAs generally follow a “use-it-or-lose-it” rule, meaning any funds you don’t spend by the end of the plan year are forfeited.

However, some plans offer flexibility through either a grace period or a carryover, but not both.With a grace period, you may have up to 2.5 months after the plan year ends to use up the remaining funds for qualified expenses.Your employer isn't permitted to refund any part of the balance to you.  A carryover can allow up to $640 of unused amounts remaining at the end of the plan year to be paid or reimbursed for qualified medical expenses you incur in the following plan year.If the plan permits a carryover, any unused amounts in excess of the carryover amount are forfeited.  Note that these options depend on your specific plan, and employers are not allowed to refund any remaining FSA balance.

FSA and HSA in the same household: Managing overlapping eligibility for married couples Enrollment in a general-purpose health FSA disqualifies both the employee and their spouse from contributing to an HSA.As a result, if either spouse has a general-purpose health FSA, neither can contribute to an HSA — even if they have HDHP coverage.This ineligibility continues even if they deplete the FSA account balance to zero.What happens if you or your spouse lose FSA coverage mid-year? This can happen due to job termination or a permitted election change — which covers certain life events like marriage, job loss or the birth of a child that allow benefits adjustments outside the usual enrollment period.

In either case, the FSA coverage ends on the date of the change.Example: If your spouse terminates employment on October 15, FSA coverage ends the same day.The spouse typically has a 90-day “run-out” period to submit claims for expenses incurred before termination.This run-out period doesn’t count as active coverage, so it doesn’t impact your or your spouse’s HSA eligibility.

Assuming no other disqualifying coverage, the employee could become HSA-eligible on November 1 if they are covered by an HDHP.Note that this example assumes the spouse does not elect COBRA for the FSA.Coverage under the FSA can continue through the end of the plan year (and possibly longer if the plan offers a carryover option) if the spouse elects COBRA.Fixing HSA contribution mistakes If you mistakenly contributed to an HSA while ineligible, there are steps to fix this and avoid penalties.

Stop contributions If you realize you’re not eligible for an HSA, take immediate action: Stop employer contributions: Ask your employer to stop any HSA contributions.Stop personal contributions: You can also stop your own contributions at any time.There’s no need for a qualifying life event to adjust your HSA contributions.Correct past contributions If ineligible contributions have already been made, contact your HSA custodian to request a corrective distribution.

This helps you avoid the 6% excise tax that applies to excess contributions.If an employer contributes to the HSA of an employee who was never HSA-eligible, the IRS considers the HSA to be invalid since it was not properly established.In this situation, the employer can fix the error before the end of the calendar year by requesting that the HSA custodian return the contributions, along with any applicable earnings and administrative fees, back to the employer.Assuming the custodian agrees to return the funds, the employer should process the correction as follows: Employer contributions: These are refunded to the employer.

Employee contributions: These are returned to the employee as taxable income, subject to withholding and payroll taxes.It's important to note that this correction method applies only if the employee was never HSA-eligible during the year at issue.  Address mid-year loss of eligibility If you make contributions as an eligible individual but lose eligibility mid-year (due to a change in insurance, for example), those contributions are nonforfeitable.In such cases, any appropriate corrections for excess contributions would need to be addressed directly by the employee with the HSA custodian.Understand tax implications  If contributions aren’t returned by the end of the year, they’ll be included as income on your W-2 form.

Here’s what to do: W-2 adjustments: The employer may need to issue a corrected W-2 (W-2c) reflecting the excess contributions as income.Avoid the 6% excise tax: Arrange a corrective distribution with your HSA custodian by the tax filing deadline (April 15) to avoid a 6% excise tax.Report this on Line 14b of Form 8889 with your tax return.If the excess contribution was made pre-tax through payroll and was not reported as income on the Form W-2, it must be reported as “Other Income” on the individual tax return.

If the excess contribution was made outside of payroll, the individual cannot claim a deduction for that excess amount.Managing HSA eligibility is your responsibility Most importantly, employers are not responsible for tracking whether employees or their spouses have other disqualifying coverage, such as an FSA, or any changes in their insurance coverage throughout the year.This means it’s up to the employee to ensure they meet HSA eligibility requirements and avoid the 6% excise tax on excess contributions.For married couples, it’s especially important to understand how an FSA might impact HSA eligibility.

Being aware of the rules and any implications of other coverage helps employees make informed decisions about their health benefits and avoid potential issues with contributions.If you want to maximize your healthcare savings and navigate the complexities of HSA and FSA eligibility, consulting with a professional who understands the specifics of healthcare savings accounts can be a valuable next step.Fill out the form below for a free intro call with our team of experts at SLP Wealth.Get the best discounts for financial planning with SLP Wealth See what discounts you could get by filling out the form below.

SLP Wealth, LLC (“SLP Wealth”) is a registered investment adviser registered with the United States Securities and Exchange Commission with headquarters in Durham, NC.