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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
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Experience:  10 years experience
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HSA and FSA issue

Customer Question

Employee A has a HDHP with HSA account. Employee A has Spouse with a F.S.A. account and other insurance. Employee A used FSA funds to pay for health care earlier this year, they learned that they are not in compliance...what can they do to minimize IRS implications?


need this information immediately...thank-you

Submitted: 5 years ago.
Category: Tax
Expert:  L Dietz CPA replied 5 years ago.

Hello and welcome to Just Answer. I have 20 plus years experience in all areas of US taxation including multi-state and international issues.


I am working on your answer, but need some additional information.


Are you an employer asking for assistance, or the taxpayer?


Does the spouse have un-reimbursed medical expenses exceeding the amount of Employee A's health care distribution from the FSA?




Customer: replied 5 years ago.


We are the employer and the person has just advised me that they have done this for 2011. They will fix it going into next year. In this case, Employee A has the H.S.A. account and their spouse had the F.S.A. Employee A had a lot of medical challenges this year and used the majority of both funds. Funds combined did not exceed maximums, they totaled made sense the the E&S to use the FSA (use it or lose it) first and then the HSA which carries over and therein lies the problem.


As a trailer from that question comes the question of the employee who may marry during the year and not advise us (or may not be aware) that the new spouse has an FSA, which therefore makes them eligible by marriage and then not in compliance with the IRS due to the existing HSA even if they don't share health coverage for the remainder of the plan year.

Expert:  L Dietz CPA replied 5 years ago.

IRS Publication 969, Health Savings Accounts and Other Tax Favored Health Plans, and Form 8889 and its instructions, can be downloaded from for information on determining employee HSA eligibility. HSA eligibility is determined on a month by month basis by determining if the individual was eligible on the first day of each month of the year. The tricky part is determining whether the employee fails to be eligible, which is determined by whether the employee has failed to maintain High Deductible Health Care coverage (HDHC) or by having other unallowed coverage. In addition, the employee must remain eligible during the "testing period", which for a calendar year plan is December 1 of the current year through December 31 of the next year.



If the employee and spouse each had self-only coverage, I believe the employee can disregard the fact that the spouse had other insurance coverage or an FSA in determining his eligibility. See Pub 969, Page 4, Other health coverage. In this case, rather than the employee failing to have HDHP coverage or having unallowed coverage, the spouse may have had an ineligible distribution from her FSA, in which case she should consult her FSA administrator for how to remedy the situation.


In any other scenario, where one or both spouses had family coverage, then the employee has a possible failure to maintain HDHP coverage due to the FSA distribution.


Did either the employee or spouse have family coverage?