The HSA Eligibility Trap for Married Couples

Question: What is the most common trap that causes married employees to inadvertently lose HSA eligibility?

Short Answer: A spouse’s enrollment in a general purpose health FSA provides “coverage” (i.e., the ability to have out-of-pocket medical expenses reimbursed) for both the spouse and the employee. Because the general purpose health FSA is disqualifying coverage for HSA eligibility purposes, the spouse’s FSA enrollment blocks both the spouse and the employee from making or receiving HSA contributions.

The Basics: HSA Eligibility
Health Savings Account (HSA) eligibility is required for an individual to make or receive HSA contributions. Individuals must satisfy the following four requirements to be HSA-eligible:

1. Be covered by a qualified high deductible health plan (HDHP);

2. Have no other disqualifying health coverage;

3. Not be enrolled in any part of Medicare; and

4. Not be able to be claimed as a dependent on someone else’s current-year tax return.

For more details:

• The HSA Eligibility Requirements: Part I

• The HSA Eligibility Requirements: Part II

• Newfront Go All the Way With HSA Guide

HSA Eligibility Requirement: No Disqualifying Coverage
HSA-eligible individuals cannot have any other health coverage that is not HSA-compatible. In general, any type of health coverage that covers non-preventive medical expenses prior to satisfying the statutory minimum HDHP deductible is disqualifying coverage that blocks the individual from HSA eligibility. Employees with disqualifying coverage can still enroll in the HDHP, but they cannot make or receive HSA contributions.

General Purpose Health FSA: Disqualifying Coverage for Both Spouses
Enrollment in a general purpose health FSA is disqualifying coverage because it reimburses non-preventive medical expenses prior to satisfying the minimum statutory HDHP deductible. Most employers are aware of this issue and therefore appropriately prevent any employee enrolled in the general purpose health FSA from making or receiving HSA contributions, even if that employee is enrolled in the company’s HDHP.

The lesser-known trap involves the employee’s spouse. Health FSAs almost universally reimburse medical expenses incurred by both the employee and the spouse. The result is that if either spouse is enrolled in the general purpose health FSA through their respective employer, neither spouse is HSA-eligible.

Example 1:

• Kate Austen is a waitress at Neighborhood Diner and enrolled in their general purpose health FSA.

• Kate’s spouse James “Sawyer” Ford works at Big Time Banks and is enrolled in their HDHP.

Result 1:

• Both Kate and James are not HSA-eligible because Kate’s general purpose health FSA enrollment is disqualifying coverage for both individuals.

• Sawyer can remain enrolled in his employer’s HDHP, but he cannot make or receive HSA contributions.

What Can Be Done to Remedy This HSA Eligibility Issue?
The HSA eligibility trap presents a concerning conundrum for married couples who have not considered the HSA eligibility status of the other spouse when making benefit elections with their employer. In a scenario like the example above, it is often well into the plan year when one of the spouses realizes the health FSA-driven HSA eligibility predicament into which they have unwittingly fallen. At that point, the spouse with the health FSA (Kate in the example above) will typically reach out to their employer requesting to:

1. Revoke the health FSA election, or

2. Convert the health FSA election to a limited purpose FSA.

As discussed in more detail below, the employer generally cannot accommodate either request. The result is that the employee remains in the HDHP but cannot make or receive HSA contributions. Request #1: No Mid-Year Permitted Election Change Event The employer should not grant the request to revoke the health FSA election because the employee has not experienced a mid-year permitted election change event. Employees’ elections to make pre-tax FSA contributions are governed by Section 125 of the Internal Revenue Code. The Section 125 cafeteria plan rules are very strict when it comes to the irrevocability of employees’ elections.

That general rule under Section 125 is that all elections (including an affirmative or default election not to participate) must be:

1. made prior to the start of the plan year, and

2. irrevocable for the plan year unless the employee experiences a Section 125 permitted election change event.

The permitted election change events are set forth in Treas. Reg. §1.125-4 (e.g., marriage, divorce, birth, adoption, change in employment status affecting eligibility, change in residence affecting eligibility). There is no option for employers to make exceptions to these rules. Engaging in this practice would risk disqualifying the entire Section 125 cafeteria plan if discovered by the IRS, potentially resulting in all elections becoming taxable to all employees.

For more details:

• Newfront Section 125 Cafeteria Plan Guide

• Newfront Section 125 Permitted Election Change Event Chart

Summary: An employee’s mid-year discovery that the general purpose health FSA is not compatible with their spouse’s HSA eligibility is not a mid-year permitted election change event to revoke the health FSA election.

Request #2: No Basis to Convert the General Purpose Health FSA Election to Limited Purpose
The other common request from employees in this situation is to convert their general purpose health FSA to limited purpose to preserve their spouse’s HSA eligibility. A health FSA that is limited to dental, vision, and preventive expenses is not disqualifying coverage. This approach does not affect employees’ HSA eligibility because there is an exception to the HDHP minimum deductible requirement that offers the ability to provide first-dollar coverage (i.e., not subject to the deductible) for preventive services and “permitted coverage” without affecting HSA eligibility. Permitted coverage includes dental care and vision care.

While we do have IRS guidance permitting conversion of a carryover or grace period balance to limited purpose at the start of a new plan year where the employee is moving to the HDHP, there is no IRS guidance suggesting that this process is available at any other time or for any other reason. Mid-year conversions therefore are generally not a recommended practice.

• For more details: How the Health FSA Carryover and Grace Period Affect HSA Eligibility

Where the third-party administrator makes available a mid-year conversion to limited purpose, some employers may be comfortable permitting it given that a) the employee’s pre-tax election is not changing, and b) the scope of the benefit is narrowing (rather than broadening) because of the change. While this is a potentially reasonable (albeit aggressive) position, employers should be aware of the major pitfalls that could result.

Retroactive Mid-Year Conversions (Generally Not Recommended): Addressing YTD Claims
If the conversion is designed to be retroactive, it can be a challenge to address year-to-date claims already processed. The plan generally must follow the IRS process for correcting improper health FSA payments.

• For more details: Correcting Improper Health FSA Payments

Prospective Conversions (Generally Not Recommended): HSA Eligibility Abusive Practice Potential If the conversion is designed to be prospective, there is a risk employees could abuse the process to maximize HSA contributions in a manner the IRS may view as inconsistent with the HSA eligibility rules. For example, an employee could elect the general purpose health FSA through November, convert to a limited purpose FSA in December, and take advantage of the last-month rule to make a full contribution for the year. In the interim, the employee would maintain first-dollar coverage through the general purpose health FSA for 11 of 12 months.

• For more details: The HSA Contribution Rules

Summary: There is no IRS guidance that supports allowing a health FSA conversion to limited purpose mid-year upon the employee discovering the health FSA presents an HSA eligibility issue for the spouse. In most cases, employers should avoid the risk and burdens associated with the approach.

Health FSA Disqualifying Coverage Period is Generally the Entire Plan Year
The employee and spouse are not HSA-eligible for as long as the employee or spouse remains covered under a general purpose health FSA (i.e., expenses are eligible for reimbursement). The employee and spouse are still considered covered by the health FSA even if the spouse drains the account balance to zero mid-year.

Example 2:

• Mike and Jessica are married and both complete open enrollment for the 2026 calendar plan year.

• Mike enrolls in employee-only HDHP coverage through his employer Halo Inc. for the 2026 calendar plan year.

• Unaware of the HSA eligibility trap, Jessica enrolls in a general purpose health FSA through her employer Magic Kingdom Unified School District for 2026.

• Jessica spends her full $3,400 health FSA election by the end of June 2026.

• Jessica remains employed and a participant in the health FSA through the end of 2026.

Result 2:

• Mike is not HSA-eligible during his spouse’s health FSA period of coverage, which is all of 2026.

• This means that although Mike can still be enrolled in the Halo Inc. HDHP, he cannot make or receive HSA contributions for all of 2026.

• The fact that Jessica spent down her entire health FSA balance by the end of June does not affect Mike’s HSA eligibility for the second half of 2026 (i.e. he remains ineligible).

If the spouse enrolled in the general purpose health FSA terminates from employment or experiences a Section 125 permitted election change event to revoke the health FSA election, the period of coverage under the health FSA will end (provided the spouse does not elect COBRA for the health FSA). The health FSA is no longer disqualifying coverage—and the employee can become HSA-eligible mid-year—as of the first day of the calendar month after the spouse’s loss of eligibility or revocation of election for the health FSA.

Example 3:

• Same as Example 2, except Jessica terminates employment with Magic Kingdom Unified School District June 15, 2026, and as a result she loses health FSA eligibility on that date.

• Jessica does not elect COBRA for the health FSA.

Result 3:

• Jessica’s health FSA coverage ends in mid-June, 2026.

• This means that Mike becomes HSA eligible beginning in July 2026.

• Mike can generally make and receive HSA contributions up to one-half the statutory limit ($2,200 in 2026) based on his HSA eligibility for six months of the year.

• If Mike commits to maintaining HSA eligibility for the 13-month period from December 2026 through all of 2027, he can take advantage of the last-month rule to contribute up to the full statutory limit in 2026.

Employee’s HSA Eligibility Issue is Purely an Individual Income Tax Concern
HSA eligibility is generally an individual income tax issue that does not involve the employer. Therefore, with limited exceptions, the employer is not responsible for determining the HSA-eligible status of employees.

Employers are responsible for confirming only the following three items with respect to an employee’s HSA eligibility:

• Whether the employee is covered by an HDHP sponsored by that employer;

• Whether the employee has any disqualifying coverage sponsored by that employer; and

• The employee’s age for determining eligibility for catch-up contributions. (Employers may rely on employees’ representations as to their date of birth.)

Most importantly, employers are not responsible for determining or monitoring whether employees have any outside disqualifying coverage. For example, this means it is not the employer’s responsibility to verify:

• Whether the employee is enrolled in non-HDHP major medical coverage through a family member;

• Whether the employee’s spouse is enrolled in a general purpose health FSA (which is disqualifying coverage for both the spouse and employee); or

• Whether the employee is enrolled in any part of Medicare.

Disqualifying coverage issues related to a plan not sponsored by the employer are exclusively the employee’s responsibility because they are an individual income tax issue. Where employees have outside disqualifying coverage such as through a spouse’s general purpose health FSA, they should work directly with the HSA vendor to process any required corrective distributions by the tax filing deadline (generally 4/15) to avoid the 6% excise tax on the excess (ineligible) contributions. This process does not involve the employer.

For more details:

• Employer HSA Contributions

• Correcting Excess HSA Contributions

Reminder: Employees Should be Permitted to Enroll in Limited Purpose Health FSA Even if Not in HDHP
Some benefits administration systems are designed by default to block limited purpose health FSA elections for employees who are not enrolled in the employer’s HDHP. The purpose of this restriction ostensibly is to prevent employees from inadvertently electing the limited purpose health FSA when they meant to enroll in the general purpose health FSA, perhaps because they do not understand the reasons for each and the differences between them.

However, it can be a very reasonable and rational decision for a non-HDHP participant to enroll in the limited purpose health FSA. For example, employees who want to utilize the health FSA but have a spouse enrolled in an HDHP may want to take advantage of the employer’s limited purpose health FSA to preserve their spouse’s HSA eligibility.

Accordingly, employers should either:

1. Allow all eligible employees to elect the limited purpose health FSA (regardless of HDHP enrollment), with clear communication in the benefits administration system that the option is designed for employees who are HSA-eligible or employees with a spouse who is HSA-eligible; or

2. Permit a manual workaround for employees who specifically request limited purpose health FSA enrollment to preserve a spouse’s HSA eligibility.

Of these options, the first approach is best practice to ensure all eligible employees are aware of the ability to elect the limited purpose health FSA even if they are not enrolling in the HDHP. Clear communication in the benefits administration system and during the open enrollment season should sufficiently address any concerns employers have about the potential for inadvertent limited purpose health FSA enrollment.

Will Congress Ever Fix This HSA Eligibility Trap for Married Couples?
In July 2025, Congress passed the One Big Beautiful Bill Act (OBBB) with many significant changes to employee benefits law. The final OBBB expanded HSA access and utilization in multiple areas, but it was nonetheless much “skinnier” than the original House-passed version of the bill.

The House version of the OBBB was far more ambitious in its efforts to expand HSAs. Among the HSA provisions from the original House-passed version of the bill that did not make it into the final OBBB was a change that would have allowed individuals to be HSA-eligible where their spouse is enrolled in a general purpose health FSA. This provision would have rendered moot the entire HSA eligibility trap issue addressed in this post if it had been retained in the final bill.

Although this legislative fix was not successfully included in the OBBB, there may be further efforts to revive the provision. For example, some of the vocal industry groups that support HSAs released a coalition letter arguing for the Senate to include HSA expansions in the House-passed version of the OBBB. The effort was somewhat successful in that it moved the Senate (which originally released an HSA-devoid draft of the bill) to include the more limited expansions in the final OBBB. These industry groups may continue to lobby for the remaining provisions that were left on the cutting room floor.

Furthermore, the House Freedom Caucus (a group of members generally credited with inclusion of the broader array of HSA provisions in the original House-passed OBBB) roundly criticized the final OBBB’s HSA expansion efforts as not “substantive” and “watered down.” Look for such groups to continue to press Congress to incorporate the original House-passed OBBB HSA expansions—including the fix for the HSA eligibility trap based on a spouse’s general purpose health FSA enrollment—in future legislation. For more details:

• How the One Big Beautiful Bill Affects Employee Benefits

• Employee Benefits Year in Review Webinar

Summary
HSA eligibility issues can be particularly challenging for many employees to understand. Employees may fall into a variety of eligibility pitfalls, chief among them being the HSA eligibility trap caused by the employee’s spouse enrolling in a general purpose health FSA. Employers can emphasize this issue in open enrollment materials to help married employees understand and sidestep this snare—and its potential headaches for all parties—by carefully coordinating benefit elections with their spouse.

Relevant Cites:

IRS Notice 2005-86:
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.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).