The FSA That Killed the HSA
Marcus, 63, is enrolled in his employer's self-only HDHP effective January 1 and is over 55, so he is catch-up eligible. For this plan year the self-only HSA limit is $4,300 plus a $1,000 catch-up; the employer seeds $500 into the HSA in January. Marcus contributes $3,000 in a lump sum in January and plans $250 a month thereafter. On March 1, his wife Denise enrolls in a general-purpose health FSA through her own employer; that FSA can also reimburse Marcus's medical expenses. Marcus is still actively working and covered by the group plan, and he turns 65 on November 14. He likes the HSA and asks whether he can keep funding it.
1. What is the maximum that can go into Marcus's HSA for this year, and what must he do about the $3,000 he already contributed?
Read the worked answer
The FSA is the trigger. Being covered by a general-purpose health FSA - including a spouse's FSA that can reimburse your expenses - is disqualifying coverage. It is not a qualifying HDHP, so HSA eligibility ends the day the FSA coverage begins.
Eligible months: January and February only (2 of 12).
Annual limit with catch-up: $4,300 + $1,000 = $5,300
Prorated limit: $5,300 x (2 / 12) = $883 (rounded from $883.33)
Allocation: employer contributions count toward the same limit. Employer seeded $500, so Marcus's own maximum is $883 - $500 = $383.
Excess: $3,000 contributed - $383 allowed = $2,617 of excess contributions, plus attributable earnings.
Why the last-month rule does not rescue him: the last-month rule lets an eligible individual on December 1 contribute the full annual limit, but it requires eligibility on December 1 and continued eligibility for the following 13 months. Marcus is not eligible on December 1, so the rule is unavailable.
Action required: request a withdrawal of the excess plus net attributable income from the HSA custodian before the tax-filing deadline (including extensions). If he does not, the excess is taxed and incurs a 6% excise tax for each year it remains in the account. Money already in the HSA is not lost - it stays invested, and qualified medical distributions remain tax-free. Only the contributions were excessive.
2. Suppose instead Denise had elected a limited-purpose FSA (dental and vision only). Recompute the maximum, accounting for Medicare.
Read the worked answer
A limited-purpose FSA is HSA-compatible, so the FSA no longer disqualifies Marcus. The new binding constraint is Medicare.
Medicare timing:
- HSA eligibility ends for any month in which the individual is entitled to Medicare - Part A alone is enough. Many people assume only Part B matters; it does not.
- Marcus turns 65 on November 14, so Part A entitlement begins November 1 (first day of the birthday month).
- Last eligible month: October. Eligible months: January through October = 10 of 12.
Prorated limit: $5,300 x (10 / 12) = $4,416 (rounded from $4,416.67)
Less the employer's $500 seed: Marcus's own maximum = $3,916.
Practical points:
- He can make contributions through October and must stop effective November 1. Contributing for November or December creates an excess.
- Because he is actively working for an employer with 20 or more employees, he can delay Part B without penalty under the special enrollment period. But if he is already receiving Social Security, Part A enrollment is automatic and cannot be declined - so the HSA window closes at 65 whether he wants it to or not.
- He should also avoid enrolling in a general-purpose FSA at his own employer once the limited-purpose arrangement is in place.
3. Advise Marcus on coordinating the two accounts. What should he do at the next open enrollment, and what are the trade-offs?
Read the worked answer
The core trade-off is tax-advantaged capacity vs. spending flexibility.
| Feature | HSA | General-purpose FSA |
|---|---|---|
| Rollover | Unlimited; stays with him | Use-it-or-lose-it (some plans allow a small carryover or grace period) |
| Portability | Follows him to any employer and into retirement | Lost at termination |
| Uses in retirement | Qualified medical expenses, Medicare premiums, tax-free | Not available |
| Mid-year change | Contributions stop permanently when ineligible | Already funded |
Recommendation:
- This year: keep the FSA (it is already elected), stop HSA contributions immediately, and remove the $2,617 excess plus earnings. Do not let it sit - the 6% excise tax is assessed annually.
- At Denise's next open enrollment: have her switch to a limited-purpose FSA (dental/vision) or drop the general-purpose FSA. That restores Marcus's full HSA eligibility.
- Weigh the dollars: the general-purpose FSA forfeits roughly $4,400 of HSA contribution space per year, plus the payroll-tax deduction on that amount. Marcus is 63 and his HSA window closes at 65, so he has roughly two years left to build the account.
- Don't overvalue the FSA: use-it-or-lose-it money is worth less than an equal amount in an HSA, because the HSA can be invested and spent tax-free decades later, including on Medicare premiums.
Bottom line: the client's instinct is right - the HSA is the better long-term vehicle, but only if he is eligible. Eligibility is binary and month-by-month; the FSA choice, not the HDHP, is what governs it.