Key HSA and FSA Rules for Spouses + Practical Scenarios

FSAs and HSAs can get tricky within a family. While HR should never provide employees with personalized financial advice, knowing the rules can help you answer employee questions. 

Let's clarify two primary rules: 

1. Employees who want to contribute to an HSA cannot have any other first-dollar coverage, including their spouse’s FSA, unless it is a Limited-Purpose FSA (LPFSA). An LPFSA is a type of FSA that can only be used for specific expenses, typically dental and vision care.

   First-dollar coverage means that when you need to pay a medical expense, the money from your savings account (like an FSA or HSA) can be used immediately. You don’t have to pay with your own pocket money first or meet a deductible before using your FSA or HSA funds. This means your savings account for medical expenses covers the costs from the first dollar spent without you needing to pay anything out-of-pocket initially.

2. If both spouses have High-Deductible Health Plans (HDHPs) and are eligible for HSAs, they can each open an HSA. However, their combined contributions must not exceed the family contribution limit, which is $8,300 in 2024. 

 

FSA vs. HSA: What’s the Difference?

Understanding the distinction between Flexible Savings Accounts (FSAs) and Health Savings Accounts (HSAs) is crucial for both employees and HR leaders at small to mid-sized businesses. Let’s dive into the key differences:

• FSAs (Flexible Spending Accounts): allow employees to set aside pre-tax dollars for healthcare expenses, dependent care, or "limited purpose" expenses like vision or dental care. Funds in an FSA do not roll over from year to year—use-it-or-lose-it rule applies. 

Key Benefit: users get immediate tax savings on contributions. 

• HSAs (Health Savings Accounts): available to individuals covered by a high-deductible health plan (HDHP), enabling them to save pre-tax dollars for healthcare expenses. Unused funds roll over year-to-year and can even be invested for potential growth, serving as a retirement savings tool. 

Key Benefit: HSAs have a triple tax advantage, meaning that contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. 

Check out our blog for more information on how FSAs and HSAs compare. 

Practical Scenarios for HSAs and FSAs Within a Family  

Let’s look at a few examples of how FSAs and HSAs work within a family: 

Example 1: The Jones Family

Sarah Jones, a new employee, approaches you with a concern. She has an HSA-compatible high-deductible health plan (HDHP) and wants to contribute to her HSA. However, her spouse has an FSA through their employer. An FSA is a flexible savings account that allows you to set aside money every month to use for out-of-pocket medical expenses. Unlike an HSA, an employee does not have to be enrolled in an HDHP to use an FSA. 

According to IRS rules, Sarah cannot contribute to her HSA because her spouse’s FSA can be used to cover her medical expenses before the deductible is met. The reasoning behind that is that both the FSA and the HSA will reimburse expenses prior to the deductible being met. Expenses would be covered under both plans and as such, disqualify one another. 

Solution: Sarah can check if her spouse’s employer offers a limited-purpose FSA (LPFSA) or a post-deductible health FSA. An LPFSA restricts reimbursements to dental and vision expenses only, making Sarah eligible to contribute to her HSA. When using a post-deductible FSA, once a certain deductible is met, limitations are lifted and all eligible expenses can be covered by FSA funds.  

Example 2: The Miller Family

Cory Miller is confused about why his HSA contributions are not being accepted. After a brief conversation, you discover that his spouse also has an FSA, and their employer does not offer an LPFSA. John and his spouse are stuck in a bind.

Solution: While his spouse’s FSA remains active, he cannot contribute to his HSA. However, if his spouse’s FSA coverage ends, Cory can then start contributing to his HSA again.

Example 3: The Lee Family

Lisa Lee’s family is planning for a significant medical expense next year. Lisa has an HSA, and her spouse has an LPFSA. They want to maximize their tax-advantaged savings.

Solution: Lisa can continue to contribute to her HSA, and her spouse can contribute to the LPFSA. They can strategically allocate Lisa’s HSA funds for broader medical expenses while the LPFSA covers predictable dental and vision costs. This approach maximizes their tax savings and ensures they are prepared for upcoming healthcare expenses.

While you can’t offer your workforce-specific tax or financial advice, you can encourage employees to review their healthcare and savings strategies annually during open enrollment periods. You can also refer employees to your broker for any additional questions so they can make the best and most informed financial decisions for themselves. 

Additional Resources

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