Cropped shot of an affectionate young couple going through paperwork at home
Confused about HSAs and FSAs? In my previous post, I broke down the differences between the HSA and FSA and how to choose between the two based on your needs and personal financial situation. In this post, I’ll explore the most common scenarios for using these accounts when married or in a domestic partnership so that you can maximize savings and stay in the good graces of the IRS.
Scenario 1: What if one spouse or partner has an HSA-ineligible plan (non-high deductible health plan)?
If you are covered by your partner’s family non-HDHP, then you cannot contribute to an HSA and neither can your spouse/partner. However, if you are not covered by your spouse’s family plan and are enrolled in an HDHP, you can contribute to an HSA. You would be eligible to contribute up to the 2022 IRS single coverage HSA limit of $3,650 inclusive of any employer contributions.
There is however one important caveat to be aware of regarding the FSA. According to IRS rules, a healthcare FSA is considered an additional medical plan. As a result, to remain HSA-qualified and contribute to the account, you or your spouse cannot have a general-purpose FSA.
However, you can have a limited-purpose FSA, which can be used alongside the HSA to help pay for dental and vision expenses. Just remember that unlike the HSA, the FSA has a use it or lose it rule. Check with your plan provider to confirm if there is any amount that can be rolled over from year to year so that you can plan accordingly and not leave any money behind.
Scenario 2: Can I use my HSA funds to pay for my spouse’s or domestic partner’s medical expenses?
According to IRS regulations, you can only reimburse your own, your spouse’s and your tax dependents’ eligible expenses tax-free from your account. Any distribution for qualified expenses incurred by a domestic partner or ex-spouse, unless they are your tax dependent (which isn’t common), are included in your taxable income and subject to a 20% tax penalty unless you’re age 65, disabled, or deceased.
Scenario 3: Can I use an FSA to pay for my spouse or domestic partner?
FSA accounts follow the same IRS regulations. You must be legally married to use your healthcare FSA to pay for your spouse’s eligible healthcare expenses. As a result, a domestic partner would not qualify for reimbursement either.
Scenario 4: Is there a way that I can reimburse a domestic partner’s or ex-spouse’s eligible expenses with qualified HSA dollars?
Possibly. A domestic partner or ex-spouse covered by your medical plan who has no other disqualifying coverage and isn’t your tax dependent is eligible to open an HSA to which anyone, including you, can contribute to. Your domestic partner or ex-spouse can then take tax-free distributions to reimburse eligible expenses that they and their tax dependents incur.
Regarding the contribution limit, IRS regulations and pursuant guidance haven’t clarified the rules that address domestic partners, ex-spouses and children who are no longer a parent’s tax dependent aside from those that remain on the family medical plan until their 26th birthday. Some tax advisors have taken a position that each unmarried adult can deposit up to the family limit in each respective account, and others advise on splitting that limit so it’s best to seek the counsel of a qualified tax professional for formal advice on your situation.
Scenario 5: When does it make the most sense to open separate HSA accounts for married couples?
The IRS allows an additional $1,000 catch-up for eligible HSA account holders aged 55 or older. To take advantage of this, each spouse must have an HSA account whether it’s for a spouse to simply make the $1,000 catch-up or in the scenario that each has an eligible HDHP plan, where they must split the $7,300 2022 family maximum and each make the respective $1,000 contribution. In addition, if a married couple each has access to a high-deductible health plan at their respective employers, it is more economical in most cases for them to sign up for separate individual coverage as premiums are typically lower that way. This can allow married couples to take advantage of employer HSA contributions, which have become increasingly common. You can read more about other advantages here.
Scenario 6: Can I use HSA dollars for eligible expenses incurred by my adult child who is no longer my tax dependent?
Once the covered adult child is no longer your dependent, you can no longer use HSA dollars to pay for their eligible expenses. What you can do is have that child open their own HSA account. If they are covered under your family plan, they can effectively contribute up to the family maximum ($7,300 for 2022) in their own HSA. This can be great way to help them pay for their expenses (parents can help fund the HSA if they want to) and encourage them to save over the long term. Read more about the benefits of treating an HSA as a long-term savings vehicle here.
Scenario 7: Can I use FSA dollars for eligible expenses incurred by my adult child who is no longer my tax dependent?
In short, yes, if they not older than 26. A general or limited-purpose FSA follows medical-plan eligibility rules. That means under federal law, you can cover children on your medical plan until they turn 26, whether they are your tax dependents or not. If an adult child who no longer is your tax dependent incurs an eligible medical expense, you wouldn’t be able to reimburse the expense tax-free using an HSA, but you could from your general or limited-purpose health FSA.
In summary…
If used properly and with thoughtful consideration, HSAs and FSAs can be great resources to save you money today and increase savings for the future. After reviewing these scenarios, be sure to take note of the ones that apply to you. If you find that one is unclear, or you have an additional nuance in your situation not covered here, don’t hesitate to engage a qualified financial planning professional. Your employer might just offer you access to one as part of your financial wellness benefit.
