Can I Have an FSA and HSA in the Same Year?

Balancing healthcare savings tools like Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) can be a strategic move for managing medical expenses. These accounts offer tax advantages, but navigating their compatibility within the same year requires careful understanding of specific rules and restrictions.

HDHP Alignment

To use a Health Savings Account (HSA), one must be enrolled in a High-Deductible Health Plan (HDHP). The Internal Revenue Service (IRS) defines an HDHP as a health insurance plan with specific deductible and out-of-pocket limits. For 2024, the minimum deductible is $1,600 for individual coverage and $3,200 for family coverage, with maximum out-of-pocket expenses capped at $8,050 for individuals and $16,100 for families. These thresholds establish HSA eligibility.

HDHPs often cover preventive services without requiring the deductible to be met, a feature that enhances the plan’s value when paired with an HSA. This alignment allows for tax-free savings on qualified medical expenses, improving financial efficiency.

Limited-Purpose FSAs

Limited-Purpose Flexible Spending Accounts (FSAs) are designed for individuals contributing to both an FSA and an HSA in the same year. Unlike general-purpose FSAs, these accounts are restricted to dental and vision care expenses, enabling them to coexist with an HSA without compromising its tax advantages.

The IRS permits this arrangement because limited-purpose FSAs and HSAs cover distinct expenses. While an HSA can address a broad range of medical costs, a limited-purpose FSA focuses on specific needs like dental cleanings and vision exams. This targeted approach allows for efficient allocation of healthcare funds and optimized tax savings.

Contribution Caps

Managing contribution limits for FSAs and HSAs is crucial. For 2024, the IRS sets the annual HSA contribution limit at $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those aged 55 and older. FSAs have a separate contribution cap of $3,050 per year per account holder.

HSA contributions reduce taxable income, while FSA contributions are also pre-tax but subject to the “use-it-or-lose-it” rule, which requires funds to be spent by the end of the plan year. Some employers offer a grace period or carryover options, but these vary by plan. Careful planning is necessary to avoid exceeding contribution limits or losing unused FSA funds.

Tax Reporting Protocols

Tax reporting for FSAs and HSAs requires attention to how contributions and distributions are documented. For HSAs, the IRS mandates reporting through Form 8889 alongside Form 1040. This includes detailing contributions, including employer and catch-up contributions, and distributions for qualified expenses. Retaining receipts for HSA expenses is critical for compliance.

FSAs are not reported directly on tax returns, but accurate record-keeping is essential. Contributions are pre-tax, and reimbursements require documentation of eligible expenses. Employers typically provide a year-end summary of FSA activity, which should be reviewed for accuracy. Monitoring account balances helps ensure compliance with contribution limits and prevents penalties.

Coordination Under Employer Plans

Employer-sponsored plans play a significant role in coordinating FSAs and HSAs. Employers may offer both general-purpose and limited-purpose FSAs, as well as HDHPs that qualify for HSA contributions. These offerings influence employees’ healthcare savings strategies.

Some employers provide automatic enrollment in FSAs or contribute to employees’ HSAs as an incentive for HDHP enrollment. For example, an employer might contribute $500 annually to an employee’s HSA. Employees must ensure they are not enrolled in a general-purpose FSA, which disqualifies them from HSA contributions. Limited-purpose FSAs are often offered as an alternative.

Employers may also include provisions that convert unused general-purpose FSA funds to limited-purpose FSA funds at year-end to maintain HSA eligibility. Understanding these provisions is critical, as employer decisions directly impact employees’ ability to optimize healthcare savings. Employees should carefully review benefits documentation and consult HR or benefits administrators for guidance.

Rollover Provisions

Rollover provisions are key when managing FSAs and HSAs together. HSAs allow indefinite fund rollover, while FSAs have stricter rules. The IRS permits employers to offer either a carryover option for unused FSA funds—up to $610 for 2024—or a grace period of up to 2.5 months. Employers cannot offer both options, and this choice affects healthcare spending plans.

For individuals using both an HSA and a limited-purpose FSA, understanding rollover mechanics is essential. If an employer offers a carryover provision, unused FSA funds must remain limited in scope to preserve HSA eligibility. Mismanagement could disqualify an individual from HSA contributions in the following year, potentially resulting in tax penalties.

In some cases, employees may choose to forfeit unused FSA funds to maintain HSA eligibility. While this may seem counterintuitive, it can be a strategic decision for those prioritizing long-term HSA savings over short-term FSA benefits. Employees must weigh these trade-offs carefully, considering anticipated medical expenses and financial goals.