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I've been searching for a clear-cut answer to this for a while, to no avail. My employer benefits advisor's guidance was unsatisfactory, and my CPA hasn't gotten back to me about it. And so...once more unto the internet I go.

This will be more information than necessary, but I might as well provide all of the context in case there's something useful that I'd otherwise overlook.

Jan 1 - My wife and 2 kids were enrolled in a PPO with a small Health Care FSA (maybe just the rollover from previous year) through my employer at the time (EMPLOYER A).

Jan 31 - I was laid off from EMPLOYER A. We looked at the options, and ended up putting my wife on the individual PPO plan with a $2750 Health Care FSA election through her employer (EMPLOYER B). Meanwhile, the kids and I stayed on EMPLOYER A's plan via COBRA while I looked for a new job.

Feb - November - I stopped paying the COBRA premiums due to CARES Act, incurred very few medical expenses, but paid cash in those cases (which we will claim—but haven't yet reimbursed—through her FSA). I remained unemployed.

November 2 - I started a new job (EMPLOYER C). I can now enroll in coverage retroactive to November 2, and it's a qualifying life event that would allow me to change my wife's coverage as well. The most affordable option is to put everyone (me, wife, kids) on EMPLOYER C's HDHP + HSA, with the employer contributing a good chunk to that HSA.

We haven't made any changes yet, but my expectation is that we will cancel my wife's coverage as of November 1 and enroll her (and the family) on my new HDHP as of November 2. All affected plan years are otherwise Jan 1 - Dec 31.

The question is: Given that my wife had an FSA (last contribution was November 5) for plan year 2020, and I guess I did too on EMPLOYER A's plan earlier this year, am I allowed to contribute to an HSA for the remainder of 2020 if the previous health coverage and FSA is cancelled prior to enrolling in the new EMPLOYER C coverage?

State is Texas. Wife's premium through EMPLOYER B is currently like $400/mo. My PPO option for the whole family through EMPLOYER C would be a $450/mo premium. My HDHP option for the family would be $270/mo premium, plus employer would contribute like $300/mo to an HSA.

So, you can see that it's a lot cheaper to just get everyone on the EMPLOYER C HDHP ASAP NAACP YMCA, though only for a couple of months.

Should I...

  1. Just pay a little more for the new PPO for two months to avoid the headache.
  2. Spend down as much of the previous FSA as we can, and then switch everyone to my new HDHP + HSA and max out whatever contribution I'm allowed through the end of the year.
  3. Switch everyone to my HDHP but don't elect the HSA for this 2020 plan year, presuming the FSA disqualifies me from having an HSA, even if the plan with the FSA is cancelled.

This seems like a fairly common occurrence. And yet, it's been really hard to get a definitive answer to my specific scenario. If I'm missing any details, let me know.

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Being covered by an FSA makes you ineligible to contribute to an HSA, and spouses are automatically covered by FSAs. That means that if your wife's FSA is still active, then you are not an HSA-eligible individual. As a result, if you choose the HDHP coverage while you are covered by your wife's FSA, you would need to decline your employer's HSA contribution.

Cancelling your wife's health insurance may or may not stop the FSA coverage immediately. The FSA may still be active until the end of the year, or may even be active until sometime next year, due to a grace period (it could be as late as March 15). If you want to try to get an HSA going before the end of this year, you need to talk to your wife's employer to figure out if there is any way of stopping the FSA immediately. If you can get that done by December 1, you could be eligible to contribute to an HSA in 2020, using either a prorated contribution limit or the last-month rule.

If it is not possible to stop the FSA before the end of the year, but it is possible to have it stop at the end of the year, then you can confidently choose the HDHP+HSA starting in 2021 and accept your employer's HSA contribution at that time. As far as what to choose for these last two months of 2020, it depends on what you think your medical expenses will be in these last two months. Just remember that if you choose the lower-cost HDHP, you would need to decline the employer's HSA contribution if the FSA is still active.

If the FSA ends up being active until March 15, 2021, you would become an HSA-eligible individual after that date. The family contribution limit in 2021 will be $7200; the prorated limit for April - December next year would be $5400. Your employer's $300/month contributions for 12 months next year would come to only $3600, so you could accept employer contributions starting in January and you wouldn't have any problem. After you account for the employer contribution, you would be able to contribute $1800 of your own money into the HSA next year if you use the prorated limit, or $3600 if you end up using the last-month rule.

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  • Thanks for this. Filled in some of the gaps I was missing and addressed just about everything I was looking to know. In the end, it really comes down to a "so what?" question regarding any potential eligibility mistake. Like, realistically is the IRS going to audit my health insurance elections and come knocking on my employer's door to return a couple grand here or there? Mostly I was just seeking the "optimal" solution. You've helped me on that journey much more than my prior Google searches. – A Goldberg Nov 14 '20 at 3:30
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    @AGoldberg My parents went though an audit a few years ago, and they had their HSA turned inside out. The IRS really did want to see all of their receipts. So yes, the IRS really could come knocking and ask for money. – Ben Miller - Remember Monica Nov 14 '20 at 13:20
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Under the last-month rule described in pub 969, which you should read if you are eligible (i.e. covered by HDHP and not by disqualifying coverage) on Dec. 1 (even though you weren't eligible earlier in the year) AND REMAIN eligible through all of next year (2021) (called the 'testing period'), you can contribute (up to next Apr. 15 if you designate it) and as applicable exclude (for employer contributions) or deduct (for your own cash) the full-year amount for this year (2020) = $7100 for family, as well as the contributions in or for 2021 that you can do then. But if you don't remain eligible through the testing period, the deduction for 2020 is 'clawed back' PLUS a penalty, so you should only do this if you are reasonably confident you will remain with employer C, or at least somebody offering an acceptable HDHP (which could include COBRA from employer C), through the year.

Without that election, you are eligible only for Dec. (you aren't covered on Nov. 1 so you aren't eligible for Nov.) and thus can exclude or deduct only 1/12 of $7100.

Note this pub, like most, hasn't yet been issued for tax year 2020, so the posted version was written for tax year 2019, but I'm pretty sure there are no changes in this area for 2020 other than the dollar limits. If you want, you can get a PDF for offline reference from either the 'future developments' link near the top of the page, or the parent page for all pubs in the navigation link at the top.

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  • This was a good explanation that helped my understanding of that last month rule. One piece of your response I'm not quite clear on is the "thus can exclude or deduct only 1/12 of $7100." If I am eligible to make an HSA contribution on Dec 1 (and I've concluded that I'm probably not), then can't I contribute the full $7100 for 2020 (notwithstanding any contributions to my wife's FSA)? That is, so long as I also elect the HDHP for all of 2021. Maybe that's what you meant. Anyway, thanks for the great supplemental info here. – A Goldberg Nov 14 '20 at 4:04

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