Can My Spouse Disqualify Me? Sometimes. Especially If . . .
by William G. (Bill) Stuart | Originally posted on LinkedIn for your Health Savings Academy
Health Savings Account eligibility can be confusing when family members' coverage affects an account owner's opportunity to contribute.
By far the most common questions that benefits advisors and employers ask me fall into the category of Health Savings Account eligibility and other family members' medical coverage. At the 30,000-foot level, the concept is simple: Eligibility is determined person-by-person, and one family member's being disqualified doesn't affect anyone else in the family.
But it's not so simple. Sometimes, the other family member's disqualifying coverage extends to the Health Savings Account owner, thus disqualifying him from funding his account.
Let's look at some common disqualifying plans that cover other family members to see whether they affect everyone in the family.
Spouse Enrolls in Medicare
This is a common situation among older workers. One spouse remains actively employed and covers both on his medical plan. The other spouse also is covered by some Part of Medicare - usually Part A, which is premium-free for most Americans (premiums prepaid through payroll taxes on earned income).
Example: Reggie covers his wife Marta and himself on his company's plan. Marta retires and begins to collect Social Security benefits, which triggers her automatic enrollment in Medicare Part A. She's no longer HSA-eligible because any Medicare coverage is disqualifying.
Medicare issues individual policies only. In other words, in our example above, Medicare will pay Marta's eligible claims (coordinating with Reggie's employer's plan). But Marta's Medicare policy won't pay any claims that Reggie submits for claims that he incurs. Therefore, Marta's enrollment in Medicare doesn't disqualify Reggie from funding his Health Savings Account.
Because Reggie is covered by a family plan, he can contribute up to the statutory maximum for a family contract ($7,750 in 2023, rising to $8,300 in 2024) - even though he's the only covered family member who's HSA-eligible. Whether a Health Savings Account owner is entitled to a self-only ($3,850 in 2023, increasing to $4,150 in 2024) or family contribution is determined by the size of the contract, not how many family members are HSA-eligible.
Reggie can reimburse tax-free all of Marta's qualified expenses, even though she's not HSA-eligible. Marta's qualifying for tax-free distributions from Reggie's Health Savings Account isn't dependent on Marta's being eligible to fund a Health Savings Account herself.
Note: There may be one exception. Reggie can't reimburse Marta's Medicare premiums unless he - Reggie, the Health Savings Account owner - has turned age 65. But he can reimburse tax-free all of Marta's other qualified expenses, including Medicare cost-sharing, dental and vision services, and over-the-counter drugs, medicine, equipment, and supplies.
Spouse Enrolls on Her Company's Coverage
It's common for an empty-nester couple to enroll in two self-only medical plans through their respective employers when both remain active at work. Often, two self-only plan premiums are lower than for one family plan. And depending on the deductible structure and health, out-of-pocket responsibility may be lower with separate plans.
Example: John and Jill have raised three children who live on their own. They and their children were always enrolled on John's company's HSA-qualified plan with a $4,000 aggregate deductible. Now, with the last child no longer a tax dependent, they each enroll in self-only coverage through their respective companies - John on an HSA-qualified plan with a $2,000 self-only deductible and Jill on a non-HSA-qualified plan with a $1,000 deductible.
In this case, Jill's coverage doesn't affect John's opportunity to fund his Health Savings Account because he's not covered by her plan. She's not HSA-eligible, so Jill can't make a catch-up contribution, and because John's plan covers only him, his contribution level drops to the self-only ceiling ($3,850, versus $7,750 for a plan with two or more family members enrolled), plus the $1,000 catch-up contribution if he's age 55 or older.
Spouse Participates in Her Company's Health FSA
Here's a serious problem! Unfortunately, many Health Savings Account owners don't appreciate it and thus aren't in compliance with federal tax law.
A Health FSA falls under the definition of a medical plan. Unless the sponsoring employer narrows eligibility, under federal tax law a Health FSA automatically covers:
the employee,
the employee's spouse,
the employee's tax dependents, and
the employee's children until Dec. 31 of the year that they turn age 26.
That's a problem. And most people don't understand the issue. Rather, they often assume that if a spouse waives medical coverage but enrolls in a Health FSA, the Health FSA doesn't cover members. But that's not true. A Health FSA is a separate medical plan. A spouse can waive traditional medical coverage and participate in her company's Health FSA, in which case the family members listed above are covered by that Health FSA.
And there is no individual family member opt-out from a Health FSA, as there is with a medical plan. An employee may choose not to enroll her spouse on her company's medical plan for any reason (for example, the spouse is enrolled in Medicare or covered by his own employer-sponsored plan or his company's ICHRA). But family members can't selectively waive coverage through a Health FSA.
Thus, any Health Savings Account owner whose spouse participates in her company's Health FSA is at risk of being disqualified. But it's not automatic. Account owners who are covered by more than one medical plan can remain HSA-eligible if all their plans are HSA-qualified.
There are two common Health FSA designs:
General Health FSA. This is the standard plan design. It reimburses all qualified expenses without imposing a deductible. Because this design doesn't meet the deductible requirements of an HSA-qualified plan (minimum deductible of $1,500 for self-only and $3,000 for family coverage, increasing to $1,600 and $3,200 in 2024), people covered by the plan are disqualified from funding a Health Savings Account. They can reimburse most HSA-qualified expenses from the Health FSA (the list of qualified expenses is nearly identical), but they lose the flexibility to adjust their election as their needs change, as they can alter their Health Savings Account contributions.
Limited-Purpose Health FSA. This design is HSA-qualified. It limits reimbursement to dental and vision expenses, including over-the-counter items related to dental and vision. This coverage isn't disqualifying, whether it's in the form of an insurance policy or a reimbursement account.
This design doesn't reimburse medical services, prescription drugs, or medical OTC items. Note: There is a variation that permits reimbursement of these services when the employee attests that she's met the statutory minimum annual deductible of an HSA-qualified plan. This design isn't disqualifying because it becomes an HSA-qualified plan because it doesn't reimburse any medical-related services before imposing a statutory minimum annual deductible.
Example 1: Louisa submits to her Limited-Purpose Health FSA a claim for an MRI subject to the deductible on her HSA-qualified medical plan. The administrator rejects the claim because the service is medical.
Example 2: Min submits to her Limited-Purpose Health FSA a claim for her cost-sharing for arthroscopic knee surgery late in the plan year. If her company has a standard plan design, the administrator rejects the claim because it's medical. If her company's plan allows reimbursement of medical expenses after an employee meets the statutory minimum annual deductible, she can attest to reaching that threshold and the administrator will reimburse the claim.
Some companies that sponsor an HSA-qualified plan and a Health FSA offer a Limited-Purpose Health FSA to accommodate their employees who want to fund a Health Savings Account and participate in a Health FSA. Companies that don't offer an HSA-qualified plan generally don't sponsor a Limited-Purpose Health FSA because it's not relevant to their employee population.
A spouse's Health FSA is generally disqualifying unless her company offers a Limited-Purpose Health FSA and allows her to participate in that design. But companies that don't offer a Health Savings Account option rarely offer a Limited-Purpose Health FSA. And some (like my wife's old employer, despite my repeated protests) restrict enrollment in a Limited-Purpose Health FSA to employees covered on the company's HSA-qualified medical plan.
In short, a spouse's enrollment in her company's Health FSA is always an eligibility red flag for a Health Savings Account owner. In most cases, it's disqualifying. But not always.