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The Combination Health FSA

Question: Can employers combine a limited purpose health FSA and post-deductible health FSA without affecting employees’ HSA eligibility?

Short Answer: The combination of a limited purpose and post-deductible health FSA is not disqualifying coverage for employees enrolled in the HDHP.

General Rule: HSA Eligibility

The general rule is that an individual must meet two requirements to be HSA-eligible (i.e., to be eligible to make or receive HSA contributions):

  • Be covered by an HDHP; and
  • Have no disqualifying coverage (generally any medical coverage that pays pre-deductible, including Medicare).

HSA eligibility also requires that the individual cannot be claimed as a tax dependent by someone else.

For more details on everything HDHP/HSA, see our 2021 ABD Go All the Way With HSA Guide.

General Purpose Health FSA is Disqualifying Coverage

Coverage under a general purpose health FSA for the employee or spouse is disqualifying coverage for both individuals.  The coverage blocks HSA eligibility for both because a general purpose FSA reimburses pre-deductible expenses for both the employee and the spouse.

The result is that if either spouse is enrolled in a general purpose health FSA, neither spouse is HSA-eligible. They can both still be covered by an HDHP, but they both cannot make or receive HSA contributions.

Limited Purpose Health FSA is Not Disqualifying Coverage

Coverage under a limited purpose health FSA does not block HSA eligibility because it does not reimburse non-preventive medical expenses.

A limited purpose health FSA will reimburse only the following subset of §213(d) health expenses:

  • Dental expenses;
  • Vision expenses; and
  • Preventive medical, dental, or vision expenses.

The limited purpose health FSA can reimburse preventive medical expenses because an HDHP can provide first-dollar (i.e., pre-deductible) preventive expenses without affecting HSA eligibility.

Post-Deductible Health FSA is Not Disqualifying Coverage

Coverage under a post-deductible health FSA also does not block HSA eligibility because it does not reimburse expenses until the employee has reached the statutory minimum HDHP deductible.

The 2021 minimum HDHP deductibles are as follows:

  • Employee-Only HDHP Coverage: $1,400
  • Family (Employee + At Least One Other individual) HDHP Coverage: $2,800

The FSA will require that the employee submit an EOB or other form of similar substantiating documentation to verify that the employee has reached the minimum deductible.  Only expenses incurred after satisfying the minimum deductible are eligible for reimbursement.

Combination Limited Purpose and Post-Deductible Health FSA is Not Disqualifying Coverage

Many FSA TPAs can accommodate a combined limited purpose and post-deductible health FSA, which allows more expenses to be reimbursable than would be available under a standard limited purpose FSA.

These “combination health FSAs” offer the best of both worlds—without affecting HSA eligibility—for employees enrolled in the HDHP:

  • Pre-Deductible (Limited Purpose): Before the employee reaches the statutory minimum HDHP deductible, the FSA operates in the same manner as a standard limited purpose health FSA by reimbursing only dental, vision, and preventive expenses.
  • Post-Deductible (General Purpose): After the employee reaches the statutory minimum HDHP deductible, the FSA operates in the same manner as a standard general purpose health FSA by reimbursing non-preventive medical expenses in addition to dental, vision, and preventive expenses.

The FSA will require that the employee submit an EOB or other form of similar substantiating documentation to verify that the employee has reached the minimum deductible before reimbursing non-preventive medical expenses.  Furthermore, non-preventive medical expenses must be incurred after satisfying the minimum deductible to be eligible for reimbursement.

The IRS has confirmed in multiple forms of guidance that this combination health FSA approach is not disqualifying coverage that would prevent an employee from being HSA-eligible.

For more details on everything Section 125 and HSA:

Regulations

Prop. Treas. Reg. §1.125-5(m):

(m) HSA-compatible FSAs-limited-purpose health FSAs and post-deductible health FSAs.

(1) In general. Limited-purpose health FSAs and post-deductible health FSAs which satisfy all the requirements of section 125 are permitted to be offered through a cafeteria plan.

(2) HSA-compatible FSAs. Section 223(a) allows a deduction for certain contributions to a “Health Savings Account” (HSA) (as defined in section 223(d)). An eligible individual (as defined in section 223(c)(1)) may contribute to an HSA. An eligible individual must be covered under a “high deductible health plan” (HDHP) and not, while covered under an HDHP, under any health plan which is not an HDHP. A general purpose health FSA is not an HDHP and an individual covered by a general purpose health FSA is not eligible to contribute to an HSA. However, an individual covered by an HDHP (and who otherwise satisfies section 223(c)(1)) does not fail to be an eligible individual merely because the individual is also covered by a limited-purpose health FSA or post-deductible health FSA (as defined in this paragraph (m)) or a combination of a limited-purpose health FSA and a post-deductible health FSA.

(3) Limited-purpose health FSA. A limited-purpose health FSA is a health FSA described in the cafeteria plan that only pays or reimburses permitted coverage benefits (as defined in section 223(c)(2)(C)), such as vision care, dental care or preventive care (as defined for purposes of section 223(c)(2)(C)). See paragraph (k) in this section.

(4) Post-deductible health FSA.

(i) In general. A post-deductible health FSA is a health FSA described in the cafeteria plan that only pays or reimburses medical expenses (as defined in section 213(d)) for preventive care or medical expenses incurred after the minimum annual HDHP deductible under section 223(c)(2)(A)(i) is satisfied. See paragraph (k) in this section. No medical expenses incurred before the annual HDHP deductible is satisfied may be reimbursed by a post-deductible FSA, regardless of whether the HDHP covers the expense or whether the deductible is later satisfied. For example, even if chiropractic care is not covered under the HDHP, expenses for chiropractic care incurred before the HDHP deductible is satisfied are not reimbursable at any time by a post-deductible health FSA.

(ii) HDHP and health FSA deductibles. The deductible for a post-deductible health FSA need not be the same amount as the deductible for the HDHP, but in no event may the post-deductible health FSA or other coverage provide benefits before the minimum annual HDHP deductible under section 223(c)(2)(A)(i) is satisfied (other than benefits permitted under a limited-purpose health FSA). In addition, although the deductibles of the HDHP and the other coverage may be satisfied independently by separate expenses, no benefits may be paid before the minimum annual deductible under section 223(c)(2)(A)(i) has been satisfied. An individual covered by a post-deductible health FSA (if otherwise an eligible individual) is an eligible individual for the purpose of contributing to the HSA.

(5) Combination of limited-purpose health FSA and post-deductible health FSA. An FSA is a combination of a limited-purpose health FSA and post-deductible health FSA if each of the benefits and reimbursements provided under the FSA are permitted under either a limited-purpose health FSA or post-deductible health FSA. For example, before the HDHP deductible is satisfied, a combination limited-purpose and post-deductible health FSA may reimburse only preventive, vision or dental expenses. A combination limited-purpose and post-deductible health FSA may also reimburse any medical expense that may otherwise be paid by an FSA (that is, no insurance premiums or long-term care benefits) that is incurred after the HDHP deductible is satisfied.

IRS Notice 2005-86:

https://www.irs.gov/irb/2005-49_IRB#NOT-2005-86

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Interaction Between HSAs and Health FSAs

Section 223(a) allows a deduction for contributions to an HSA for an “eligible individual” for any month during the taxable year. An “eligible individual” is defined in § 223(c)(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.”

In addition to coverage under an HDHP, § 223(c)(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223(c)(2)(C) also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer.

However, as described in Rev. Rul. 2004-45, 2004-1 C.B. 971, an individual who is otherwise eligible for an HSA may be covered under specific types of health FSAs and remain eligible to contribute to an HSA. One arrangement is a limited-purpose health FSA, which pays or reimburses expenses only for preventive care and “permitted coverage” (e.g., dental care and vision care). Another HSA-compatible arrangement is a post-deductible health FSA, which pays or reimburses preventive care and for other qualified medical expenses only if incurred after the minimum annual deductible for the HDHP under § 223(c)(2)(A) is satisfied. This means that qualified medical expenses incurred before the HDHP deductible is satisfied may not be reimbursed by a post-deductible FSA even after the HDHP deductible has been satisfied. To summarize, an otherwise HSA eligible individual will remain eligible if covered under a limited-purpose health FSA or a post-deductible FSA, or a combination of both.

IRS Revenue Ruling 2004-45:

https://www.treasury.gov/press-center/press-releases/Documents/rev_rul200445.pdf

In the arrangements described, the individual does not fail to be an eligible individual under section 223 and may contribute to an HSA. In addition, combinations of these arrangements which are consistent with these requirements would not disqualify an individual from being an eligible individual.

For example, if an employer offers a combined post-deductible health FSA and a limited-purpose health FSA, this would not disqualify an otherwise eligible individual from contributing to an HSA.


Brian Gilmore

About the author

Brian Gilmore

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.


The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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