What's the penalty or solution for having both FSA/HSA contributions in the same household?

Thank you! This is helpful. Does she need to withdraw ALL of her 2024 HSA contributions, or just the ones made after I got my FSA? I started my FSA in March 2024, so we had about 2 months where she was contributing to her HSA but maybe was eligible? Also, will this affect our 2024 tax return in any other ways I should know about?

Since you had an FSA at any point during 2024, unfortunately she'll need to withdraw all HSA contributions made for the 2024 tax year. The IRS considers eligibility on a full-year basis in this situation, not month-by-month. Regarding your tax return, your wife will receive a 1099-SA form showing the distribution from her HSA. She'll also get a Form 5498-SA showing contributions. You'll need to file Form 8889 with your taxes to report both the contributions and the withdrawal of excess. The withdrawn contribution amount won't be deductible, and any earnings on those contributions will be added to your taxable income for 2024. Your FSA isn't affected - those contributions and qualified expenses remain tax-free.

Did taxr.ai help with calculating what portion of the earnings on the contributions were taxable? That's the part I always find confusing with these excess contribution situations. Also, did it work with your existing tax software or was it completely separate?

I'm a bit skeptical about these tax tools. Did it actually save you from paying the penalty? And how does it work with the actual HSA provider process - like does it generate the forms you need to send them?

Yes, it calculated the taxable earnings portion precisely, which was super helpful. It took my contribution dates and withdrawal date, then determined exactly what part of the growth was attributable to the excess contributions. That saved me from guessing or doing complex calculations. It worked alongside my regular tax software. I used the information from taxr.ai to correctly input everything into TurboTax. It doesn't submit forms to your HSA provider, but it creates a detailed report explaining what you need to request from them, including specific wording to use when contacting them about excess contribution removal.

How exactly does this work? Do they just call for you or are you still on the line? I've been trying to reach my HSA administrator for days about a similar issue.

This sounds too good to be true. HSA providers are notorious for long waits. You're saying this service somehow magically gets you to the front of the line? I've spent literally hours on hold trying to fix tax issues with my health accounts.

You stay on the line the whole time. Basically, you call their number, tell them who you need to reach, and they use their system to navigate the phone menus and hold times. When they reach a real person, you're still on the call and take over the conversation. It's not magic - they just have technology that handles the waiting and navigation for you. Their system continuously calls, navigates the menus, and waits on hold so you don't have to. When your HSA administrator finally picks up, you're notified and jump in for the actual conversation. It saved me nearly 2 hours of hold time when I was trying to get my excess contribution issue resolved before the tax deadline.

Hmm, I never thought of that! I'll have to check my FSA details when I get home. I'm pretty sure it's a regular medical FSA that covers all healthcare expenses, but now I'm curious. Would switching to a limited purpose FSA mid-year be an option, or is it too late for 2024?

Unfortunately, switching mid-year from a general purpose FSA to a limited purpose FSA isn't allowed unless you have a qualifying life event (like marriage, birth, job change, etc). Even if you could switch now, the fact that you had a general purpose FSA at any point during 2024 makes your spouse ineligible for HSA contributions for the entire year. For 2025, though, you could definitely consider a limited purpose FSA instead of dropping FSA coverage completely. That way, both you and your spouse could take advantage of tax-advantaged health accounts - you'd get the FSA for dental and vision expenses, and she could continue with the HSA for everything else.

I was in a similar situation and filed Form 5329 to report the excess contribution. I attached a letter explaining it was an honest mistake due to confusion about the FSA/HSA rules and that I had already withdrawn the excess amount (although after the tax deadline). The IRS did waive the penalty for me, but I've heard it's very case-by-case.

Thanks for sharing your experience! That gives me some hope. I'll try the same approach with Form 5329 and a detailed explanation letter. Did you need to provide any particular documentation with your letter, or was the explanation enough?

The explanation letter alone worked for me, but I was very specific - included dates, account numbers, the exact amount of excess contribution, and proof I had already corrected the issue (even though it was late). I also cited the relevant tax code showing I understood the rules now. One key thing: don't call it a "waiver request" since there's no formal waiver process for this penalty. Instead, I framed it as "reasonable cause" for abatement of the penalty. Also, be prepared to wait a while - it took about 3 months to get the confirmation that they accepted my explanation.

This is really helpful information, especially about the extension deadline! I didn't realize you could have until October if you file an extension. The tip about using the specific IRC section reference is gold - I've been getting nowhere with my HSA provider's customer service, but asking for tax compliance department sounds like it might actually get me to someone who understands this stuff. One question: when you created that timeline documentation, did you need to get official statements from both your FSA and HSA providers showing the exact dates, or were your own records sufficient for the IRS?

This is excellent advice about the calculation method! I'm curious - when you questioned their initial calculation, did you need to provide them with specific guidance on how to use the dollar-weighted method, or did they know what you meant once you mentioned it? I'm worried my HSA provider might not be familiar with the different calculation approaches, and I want to be prepared with the right terminology when I call them. Also, did they provide you with detailed documentation showing both calculations so you could see the difference? The fee waiver tip is great too - I hadn't thought to ask about that, but you're right that this rule confusion seems to catch a lot of people off guard during open enrollment when no one mentions the FSA/HSA incompatibility.

Great point about the FSA grace period! I ran into something similar with my employer's FSA that had a carryover provision. Even though I thought my FSA coverage ended in December, I actually had $500 carried over into the next year, which extended my HSA ineligibility. The tricky part was that HR didn't initially mention this when I asked about HSA eligibility - I only found out when I dug deeper into the plan documents. It's definitely worth checking both grace periods AND carryover rules with your benefits administrator. For the limited purpose FSA limits, you're absolutely right that they're typically lower. In my case though, since we mainly use it for dental and vision (kids' orthodontics, annual eye exams, etc.), the $2,000 limit actually covers most of our predictable expenses in those categories. The HSA flexibility for everything else, especially the long-term investment potential, makes it worth the trade-off. It really seems like there should be better disclosure about all these interconnected rules during open enrollment!

This is such a valuable point about Publication 969! I wish I had known about that resource when I first ran into this issue. The example scenarios you mentioned sound really helpful - I've been struggling to understand exactly how the family coverage rules work when spouses have different employers. Your point about both spouses needing to be HSA-eligible for family-level contributions is crucial and something I hadn't fully grasped. It really drives home how one person's FSA can affect the entire household's HSA strategy, not just their individual eligibility. The idea of getting written documentation from HR about FSA/HSA interactions is brilliant. I bet a lot of people would avoid these mistakes if the rules were clearly explained upfront instead of having to discover them after the fact when you're already dealing with excess contributions and potential penalties. Thanks for sharing the Publication 969 reference - I'm definitely going to review that before making any 2025 enrollment decisions!