Limited-Purpose And Post-Deductible FSAs With An HSA
A general-purpose health FSA or HRA usually makes an employee ineligible for HSA contributions. Two designs can sit alongside an HSA: limited-purpose and post-deductible arrangements. Here is how they differ.
Why A General FSA Disqualifies
Other Coverage
An employee covered by an HDHP and a health FSA or HRA that pays or reimburses qualified medical expenses generally cannot make HSA contributions. Employees can lose HSA eligibility without realizing it if a spouse’s flexible spending account or an employer account covers their medical costs. Remind staff to check all coverage in the household and to ask a tax adviser. For a quick estimate, use our free deductible HRA cost calculator.
Designed Around It
Plan sponsors can use FSA or HRA designs that preserve HSA eligibility. The wording of the plan document matters. Employers should review the plan documents with counsel before launch, and make sure enrollment and payroll systems apply the right account type to the right employees. Clear communication helps employees choose the option that suits their situation. You can test your own figures with our FSA tax savings calculator.
Limited-Purpose Health FSA Or HRA
Limited Categories
These arrangements can pay or reimburse the kinds of items that do not disqualify HSA eligibility, such as dental and vision, but not long-term care. Employers should spell out which expenses the account covers and keep claims administration consistent with that list. Counsel or a tax adviser can confirm how a given design fits the HSA rules for your plan.
Preventive Care Too
They can also reimburse preventive care expenses, because those can be paid without meeting the deductible. Preventive care is an exception to the general deductible rule, but what qualifies depends on the rules and the plan. Employers should define it clearly and tell employees what counts before they use the account.
Post-Deductible Health FSA Or HRA
Deductible Comes First
These arrangements do not pay or reimburse any medical expense incurred before the minimum annual deductible amount is met. Employers and administrators must set up claims processing so that covered medical expenses are not paid early. A mistake can put employee HSA eligibility at risk, so train the team and review a sample of claims regularly.
Separate Deductible
The deductible for the FSA or HRA does not have to match the HDHP deductible, but benefits cannot be provided before the minimum annual deductible amount is met. Employers should work with counsel and their administrator to document the account’s deductible and test the claims logic. Explain to employees that these accounts have their own rules, and that mixing the account types can affect eligibility.
Other Arrangements To Know
Suspended HRA
An employee can elect to suspend an HRA before the coverage period begins. During suspension it pays only preventive care and the permitted items, and HSA eligibility ends when the suspension ends. Employees need to make the election before the period starts and should understand the date HSA eligibility resumes. Employers should confirm the timing with counsel and their administrator, and put clear instructions in enrollment materials.
Retiree-Only HRA
An HRA that pays only expenses incurred after retirement does not block HSA eligibility while working. After retirement the person is no longer eligible. Employers considering this design should have counsel review the plan document, since the details decide whether the account affects eligibility. Explain to employees nearing retirement that rules about contributions and account use may change.
Grace Period Rule
Coverage during a grace period by a general-purpose health FSA is allowed only if the FSA balance at the end of the prior plan year is zero. Employers that offer a grace period should tell employees how it interacts with an HSA, and the administrator should check balances at year end. A tax adviser can confirm how the rule applies to individual circumstances.
Other Coverage That Does Not Disqualify An HSA
Permitted Insurance
Coverage such as workers compensation, tort liability, property liability, specified disease and fixed daily hospitalization is disregarded when testing HSA eligibility.
Dental, Vision And Accident
Coverage for accidents, disability, dental care, vision care and long term care does not by itself make someone ineligible for an HSA.
Telehealth And Remote Care
Telehealth and other remote care coverage is also disregarded under the statute, which is why it can sit alongside an HDHP.
Certain Health FSAs Qualify
A health FSA can be compatible if the balance is zero at plan year end, or if the person makes a qualified HSA distribution equal to the remaining balance.
Substantially All Coverage Test
A plan is not an HDHP if substantially all of its coverage is the type of coverage listed as disregarded for eligibility.
Other Protected Arrangements
The statute also protects certain VA care, benefits under surprise billing laws, and direct primary care arrangements.
Source: 26 U.S.C. 223.
Frequently Asked Questions
Can an employee have an HSA and a general-purpose health FSA?
Generally no. A general-purpose FSA that reimburses qualified medical expenses can make the employee ineligible to contribute.
What is a limited-purpose FSA?
An FSA limited to items such as dental, vision and preventive care, which preserves HSA eligibility.
What is a post-deductible FSA?
An FSA that pays nothing until the minimum annual deductible amount has been met.
Does a grace period affect HSA eligibility?
Yes, unless the prior-year FSA balance was zero at year end.
Where do I find the current rules?
IRS Publication 969 describes them. Check the current version, since details can change.
Is this legal advice?
No. This page is general information, not legal or tax advice. Rules can change, so confirm current requirements with your attorney or tax advisor.
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Laws and rules referenced
26 U.S.C. § 223 — Health savings accounts: eligibility, contribution limits and the age 55 catch-up.
IRS Notice 2004-50 — HSA questions and answers: eligibility, other coverage, FSAs and HRAs, and contribution rules.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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