8827 / Can an individual participate in both an HSA and a health FSA?

The IRS has issued guidance providing that taxpayers who participate in health flexible spending accounts (FSAs) that reimburse all qualified medical expenses are ineligible to also contribute to health savings accounts (HSAs) because participation in the FSA constitutes “other coverage” prohibited by the rules applicable to HSAs. This is the case even if the individual only participates in the FSA during the tax year because of a permitted carryover from the prior tax year.

In order to be eligible to contribute to an HSA, a taxpayer must have a high deductible health plan (HDHP), and can also have certain other types of permitted insurance and coverage, as well as preventative care coverage, but not “other coverage.” For these purposes, a taxpayer is not eligible to contribute to an HSA if he or she is covered under a health plan that is not an HDHP that provides coverage for any benefit covered under the HDHP. A health FSA that reimburses for all qualified medical expenses falls within this prohibition.

The ineligibility for HSA contributions continues throughout the entire tax year, even if the carried over amounts are exhausted early in the year.