Fix for Spousal HSA Eligibility
Health savings accounts (HSAs) provide a valuable tax-preferred savings tool, allowing taxpayers to accumulate funds on a pre-tax basis to cover qualified medical expenses—and to withdraw those funds without tax if they're used to cover a permitted expense. However, not all taxpayers are eligible to contribute to HSAs. HSAs are generally reserved for taxpayers who are enrolled in high-deductible health plans (HDHPs) and have no other disqualifying health coverage. Any type of health coverage that covers non-preventative medical costs prior to the deductible is "disqualifying coverage". General purpose health FSAs are disqualifying for purposes of the HSA eligibility rules. One often-overlooked rule disqualifies one spouse from funding an HSA if their spouse has a general-purpose health FSA.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about whether Congress should act to fix this so-called HSA spousal eligibility trap.
Below is a summary of the debate that ensued between the two professors.
Bloink: Congress should absolutely act to fix this spousal trap. It makes very little sense that one spouse's general purpose health FSA should be imputed to the other spouse for purposes of determining whether they're able to fund an HAS, assuming the spouse otherwise qualifies. Health FSAs can rarely even cover the deductible on an HDHP, given the low annual FSA contribution limits. Assuming the other spouse continues to face a high deductible, their HSA eligibility shouldn't be jeopardized by the spouse's health FSA.
Byrnes: The currently existing rule should stand. It recognizes the reality of the fact that two spouses are each able to benefit from the other spouse's health-related benefits when it comes to health savings accounts. Health HSAs are designed to allow individuals to save for their own health expenses when they have specific, high-deductible health coverage. This spousal coverage rule recognizes that it's the benefits available to the couple that are relevant to determining whether the HSA tax benefit is available.
Bloink: The purpose of HSAs is to provide taxpayers with HDHPs an opportunity to fund a tax-preferred cushion to offset the risk of incurring high health expenses given the related health insurance plan's high deductible. A spouse's general purpose health FSA doesn't provide some type of unfair benefit to their spouse, especially given the limited funds that can be contributed to the account each year--and the use it or lose it rule, which prevents the individual from accumulating large FSA balances.
Byrnes: While these HSAs are incredibly valuable, there's a reason they aren't more broadly available. We're providing a huge tax benefit for taxpayers who are likely to incur higher costs for the same treatment when compared with taxpayers with lower deductibles. We don't hand out tax incentives blindly and without purpose.
Bloink: The bottom line is that we should be doing everything we can to encourage taxpayers to take every available opportunity to save to fund the health-related expenses that will inevitably occur. That's why we have these types of tax-preferred savings accounts. One spouse shouldn't lose their otherwise-available ability to fund an HSA because their spouse has the health FSA option.
Byrnes: If one spouse has a general-purpose health FSA, which is disqualifying, it makes sense that their spouse should similarly be treated as having the benefit. We have to remember that two spouses are working together, presumably—and each can elect to forgo the general-purpose health FSA in favor of funding the HSA instead. This isn't a situation that requires Congressional action.