Tax Penalty for Having Overlapping HSA and FSA Accounts at the Same Time

You're right to be concerned about this. When you have both an FSA and HSA at the same time, the IRS gets particular about the rules. The general rule is that you can't contribute to an HSA if you have any non-qualified health coverage, which includes a general-purpose FSA. This applies even if the FSA belongs to your spouse and you're just on the plan. The IRS views this as disqualifying coverage. For the remaining FSA funds, you can absolutely continue to use them for eligible medical expenses until your FSA plan year ends - there's no penalty for using those funds. That money is already set aside pre-tax, so you should use it rather than lose it. Regarding using your FSA for dental/vision only - that would work if your FSA was designated as a "Limited Purpose FSA" specifically for dental and vision. But since yours is a general-purpose FSA, using it only for dental/vision doesn't change its classification in the eyes of the IRS. Your FSA still counts as disqualifying coverage for HSA eligibility purposes.

Hey there, I had almost the exact same situation last year and found a great resource that helped me figure it all out. I was totally confused about the HSA/FSA overlap rules until I used taxr.ai (https://taxr.ai). I uploaded my benefits documentation and answered a few questions, and they walked me through exactly how to handle the overlap period. The tool confirmed what I suspected - that I couldn't contribute to the HSA while my FSA was active, but it also helped me calculate the prorated contribution limits for the months when I was eligible. Best part was they showed me exactly how to fix some contributions I had made during the ineligible period without getting penalized. It saved me from a potential audit headache!

I was skeptical at first about taxr.ai when I saw it mentioned here, but I decided to give it a try with my HSA/FSA overlap question, and wow - it actually delivered! I uploaded my benefits documents and got a clear explanation of exactly when I could start HSA contributions after my FSA ended. The tool even helped me discover that my FSA had a grace period that extended beyond December 31, which would have made me ineligible for HSA contributions for even longer than I realized. It saved me from making contributions during months I wasn't eligible and potentially facing penalties. What impressed me most was getting a personalized timeline showing exactly when I could start contributing and the maximum allowed for each partial year. Definitely beats the generic advice I was finding through Google searches!

If you're having trouble navigating this HSA/FSA overlap issue and need to speak directly with the IRS for a definitive answer, I'd recommend Claimyr (https://claimyr.com). I was pulling my hair out trying to get someone at the IRS on the phone about a similar tax situation last year. After waiting on hold for hours across multiple days and getting disconnected, I found this service. They have a system that basically waits on hold with the IRS for you and then calls you when an agent is on the line. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. When it came to my HSA eligibility question, I needed an official answer from the IRS because my tax preparer and HR department had conflicting information.

I take back what I said about Claimyr being a scam. I was super skeptical, but I tried it yesterday after multiple failed attempts to reach someone about my HSA eligibility question. I'd spent nearly 3 hours on hold with the IRS last week only to get disconnected right when I was about to be connected. With Claimyr, I entered my number, and about 2.5 hours later (while I was in a meeting), I got a call connecting me directly to an IRS agent. The agent confirmed that I couldn't contribute to an HSA while covered under my spouse's general-purpose FSA and gave me specific guidance on how to handle the overlap period. It honestly felt like magic getting that call with an actual IRS person ready to talk. Saved me from spending another afternoon listening to that awful hold music!

One important thing nobody's mentioned yet is that there's a difference between having FSA coverage and actually making FSA contributions. If you've already spent all the FSA funds or reached your annual contribution limit, you might consider asking your employer to terminate your FSA early. Some employers will allow this with a qualifying life event, like your spouse getting new insurance. It's worth asking your HR department if this is possible, as it would allow you to start HSA contributions sooner.

Just to add another wrinkle - are you sure your FSA isn't already a "limited purpose" FSA? Some employers offer these specifically for people with HSAs. If it is, then you CAN contribute to both at the same time because a limited purpose FSA only covers dental and vision. Check your benefits documentation carefully. Sometimes these are called "LPFSA" or might be automatically converted to limited purpose if you enroll in an HDHP.

One thing to keep in mind is that even though you have to wait until January to start HSA contributions, you can still maximize your HSA for 2025. The annual contribution limit for 2025 is $4,300 for individual coverage or $8,550 for family coverage, and you can contribute the full amount as long as you're HSA-eligible on December 1st of the tax year (this is called the "last month rule"). So even though you're missing out on October, November, and December 2024 contributions, you won't lose out on the full 2025 contribution opportunity. Just make sure to use up that remaining $1,100 in your FSA before the end of the year - stock up on eligible medical supplies, prescription medications, or even things like contact lenses and reading glasses if your plan allows it. Also, double-check if your FSA has a grace period that extends into 2025. Some plans give you until March 15th to use the previous year's funds, which would extend your HSA ineligibility period even further. Better to know now than be surprised later!