The FSA That Broke the HSA
Tom, 38, and Ana, 36, are married with two children, ages 4 and 7. Tom's employer offers a high-deductible health plan with a $6,000 family deductible, a $12,000 in-network out-of-pocket maximum, and preventive care covered before the deductible; it will also deposit $1,000 into Tom's HSA if he opens one. Tom elects the family HDHP and the HSA and contributes $7,300 for the year. Ana declines the HDHP and enrolls herself and both children in her own employer's copay PPO, which has a $30 office-visit copay. Ana also elects a $500 general-purpose health FSA through her employer. Ana's birthday is March 14; Tom's is June 2. In July the 7-year-old breaks an arm; the in-network hospital bill is $9,000.
1. Is Tom eligible to contribute to an HSA this year? What is his maximum, and what should be done about the $7,300?
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The HDHP satisfies the coverage requirement, but Ana's general-purpose health FSA is disqualifying coverage. HSA eligibility requires that the individual have no health coverage other than a qualifying HDHP, and a general-purpose FSA that can reimburse Tom's expenses - a spouse's expenses are reimbursable - counts. Because the disqualification is coverage-based rather than contribution-based, he generally cannot be treated as eligible for any month of that plan year; the last-month rule does not rescue him.
Result: the $7,300 plus the employer's $1,000 are excess contributions. They must be removed with attributable earnings by the tax filing deadline, or he pays a 6% excise tax for each year the excess remains.
Had he been eligible, his ceiling would have been the family limit for the year ($8,550 for 2025) less the $1,000 employer contribution, so $7,550 through payroll.
Two fixes exist: Ana changes to a limited-purpose FSA (dental, vision, preventive) which is HSA-compatible, or the family reorganizes coverage as described below. Note that Ana's PPO covering only herself would not have disqualified Tom - a spouse's separate coverage is not disqualifying unless it also covers the HSA owner.
2. Who pays first on the $9,000 hospital bill, and how should the family handle the claim and the out-of-pocket balance?
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Coordination of benefits uses the birthday rule: when both parents cover a child, the plan of the parent whose birthday falls earlier in the calendar year is primary. Ana's birthday (March 14) precedes Tom's (June 2), so Ana's PPO is primary for both children and Tom's HDHP is secondary.
Practically: Ana's plan processes the $9,000 first under its deductible and coinsurance; the remaining patient responsibility is then submitted to Tom's HDHP as secondary, where the HDHP's deductible and coinsurance apply to what it covers. The family pays the balance after both plans have adjudicated.
Two judgment points:
- Do not assume the HDHP owes nothing because it is secondary. Secondary plans frequently pay something, and the claim must actually be submitted within its filing deadline.
- Tom's HSA cannot be used to pay these expenses, because the account should never have been funded - the FSA disqualified him. Had it been valid, HSA funds could have paid for Ana's and the children's qualified expenses even though they are enrolled in her plan, since a spouse and tax dependents qualify.
3. The family is willing to restructure. Describe a configuration that preserves HSA eligibility and explain the trade-offs they should weigh.
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Configuration: Ana and the children move onto Tom's family HDHP; Ana drops the general-purpose FSA and elects a limited-purpose FSA (or none). Tom's coverage is unchanged, but nothing disqualifying now reaches him, so he is an eligible individual for the whole year.
Numbers: family contribution limit $8,550 for 2025, of which the employer's $1,000 counts, leaving $7,550 of employee contributions. HSA funds may then reimburse qualified expenses for Tom, Ana, and both children, and unused balances roll over with no use-it-or-lose-it deadline.
Trade-offs:
- They lose the $30 copay and must fund a $6,000 deductible before the HDHP pays anything beyond preventive care. The HSA is where the premium savings and the old FSA money should go, and it should be funded early in the year rather than as expenses arise.
- The $12,000 out-of-pocket maximum is the real worst-case exposure.
- An HSA is portable and individually owned, which the FSA is not, and the FSA's $500 would have been forfeited anyway under a use-it-or-lose-it rule.
The one point that must be checked before acting: whether Ana's employer offers a limited-purpose FSA at all, and whether the HDHP's network includes the children's pediatrician.