Thanks for your additional comments Sam, that is helpful. Here is an overview of what you can and cannot do with an FSA as it applies to your situation.
The government intends that a general health FSA be used to cover expenses that are usually out-of-pocket when you are covered by a qualifying health plan. It is funded with pre-tax dollars and is on a use-it or lose-it basis.
However, an HSA is itself a form of health coverage that is tax-advantaged, and the balance can be invested. Because of this, an HSA is not considered by the government to be a health plan that "qualifies" for use with a general health FSA. However, this means that a given covered person cannot have both of these simultaneously. In your wife's case, if you have an HSA and she has traditional health benefits with an FSA, this is not considered a problem since she can only use the FSA money for expenses incurred by members of your family on her plan. However, if she were to join you on the HSA (which sounds like it could be a good idea overall), she would need to wind down her FSA and would not be able to fund it for the next year. This could be a problem if you have a lot of money in the FSA that she isn't able to spend prior to joining the HSA.
The reason why the government doesn't want one given person covered by both an HSA and given access to an FSA at the same time is that they are both tax-advantaged. What they intend is that people can set aside money pre-tax which they will use to pay their non-covered health expenses. If someone had both, there would be two potential problems:
- This person would be able to set aside twice as much money on a tax-advantaged basis as someone who had traditional health coverage rather than an HSA, and
- Someone could potentially abuse the system by funding their FSA and using it for health expenses, but not spending from their HSA. This would allow them to potentially keep investing in the HSA over a long period of time on a tax-advantaged basis instead of using this money for health expenses as intended.
If you do ultimately want your wife to be on the HSA, see if you can spend what is left in her FSA, as it will end when she ends her health coverage with her employer. If the amount you stand to lose is significant, you may need to wait another year until your next open enrollment period or life event (such as the birth of a child) to enroll her on your HSA. It is also likely that her premium on the HSA will be lower, which could impact the effect of ending her FSA.
Recently, there has also been a rule change regarding what is called a "Limited Use" FSA. These are FSAs that are used for qualifying non-"health" expenses such as dental and vision that can be used together with an HSA. This may be something that is helpful to you and/or your wife on the HSA if your employer offers this as a possibility. Please note that unlike retirement accounts, you cannot "rollover" funds between FSA plans offered by two different employers as each FSA is a separate benefit fund that is on a use-it or lose-it basis (again, because the government wants to restrict tax-advantaged contributions to what you are likely to spend).
You may also find the article here helpful to learn more about FSA/HSA combinations and Limited-Use FSAs.
I hope this helps!