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Restrictions on health savings accounts

Dear Tax Talk,
My employer is offering an HSA (health savings account), in 2006, along with our regular premium-based health plans. I currently have an FSA (flexible spending account) with my premium-based plan. Would I be able to have an FSA with an HSA? The IRS Web site was very unclear about this. Thank you!
-- Kathi

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Dear Kathi,
An HSA is intended for those individuals who don't have health insurance or have only major medical coverage. It can also work to the benefit of some individuals who rarely utilize medical services and are under a group plan that has significant employee costs.

An HSA is like an IRA, but instead of providing retirement benefits, it provides a way to pay for medical expenses on a tax-free basis. Publication 969 states that to be an eligible individual and qualify for an HSA, you must meet the following requirements.

  • You have a high-deductible health plan.
  • You have no other health coverage (except generally you can have vision and dental).
  • You are not enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else's 2004 tax return.

A high-deductible health plan, or HDHP, is one where the plan deductible is at least $1,000 for single and $2,000 for family. What this means is that your employer is trying to get you to switch to a lower-cost health plan but allowing you to save in an HSA. This might make sense for both you and the employer if you're in relatively good health and rarely incur medical expenses. The money you save on premiums will be going into a savings account that is yours to keep for life, rather than to an insurance policy that you may underutilize.

Publication 969 states that:

An employee covered by an HDHP and a health FSA or an HRA, or health reimbursement arrangement, that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements.

  • Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed under "Other health coverage" (see page 3 of Publication 969) except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.
  • Suspended HRA. Before the beginning of an HRA coverage period, you can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under "other health coverage." When the suspension period ends, you are no longer eligible to make contributions to an HSA.
  • Post-deductible health FSA or HRA. These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.
  • Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement you are no longer eligible to make contributions to an HSA.

What this means is that you cannot continue to have your traditional FSA, but you might be able to continue the FSA in a modified form.'s corrections policy
-- Posted: Oct. 5, 2005
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