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Small Business Employee Benefits and HR Blog

FSA Balance Rollover and HSA Contribution Rules

On Friday March 28th, the Internal Revenue Service (IRS) provided additional guidance on HSA and Health FSA compatibility.HSA_FSA_Compatability

The new IRS memo provides guidance on how employees will be able to roll over unused contributions remaining in Health Flexible Spending Accounts (FSAs) to the next year and not lose their ability to contribute to Health Savings Accounts (HSAs). 

Many employers offering both a high-deductible health plan (HDHP) with an HSA and a Health FSA with a rollover feature have struggled with the compatibility rules. The new guidance helps clarifies common questions.

Here's a summary of the IRS-provided Q&A on HSA and Health FSA compatibility.

1. May an otherwise eligible individual contribute to an HSA if the individual participates in a general purpose Health FSA solely as the result of a carryover of unused amounts from the prior year? 

No. An individual who is covered by a general purpose Health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This includes an individual who has coverage in a general purpose HSA solely as the result of a carryover of unused amounts in a Health FSA from the prior year.

2. May an otherwise eligible individual who participates in a general purpose Health FSA solely as the result of a carryover of unused amounts from the prior year contribute to an HSA for any month after all of the carried over health FSA amounts are paid or reimbursed for medical expenses?

No.  An individual who is covered by a general purpose health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA during the entire plan year of the health FSA without regards to the amount available from the health FSA for any month during the plan year. Thus, an individual covered by a general purpose health FSA solely as the result of a carryover of unused amounts in a health FSA may not contribute to an HSA even for months in the plan year after the health FSA no longer has any amounts available to pay or reimburse medical expenses.

3. May an individual who participates in a general purpose Health FSA and elects, for the following year, to participate in an HSA-compatible Health FSA (that is, a limited purpose Health FSA, a post-deductible Health FSA, or combination of both) also elect to have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA?

Yes, this is permissible. However, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.

4. May an individual who participates in a general purpose health FSA and elects for the following year to participate in an HSA-compatible Health FSA and have any unused amounts from the general purpose Health FSA carried over to the HSA-compatible Health FSA also contribute to an HSA during the following year?

Yes. An otherwise eligible individual participating in a general-purpose health FSA in Year 1 can elect to have any unused amounts carry over into a limited purpose Health FSA (or a post-deductible health FSA) in Year 2 and be eligible to contribute to an HSA in Year 2.

5. May a cafeteria plan that offers both a general purpose health FSA and an HSA-compatible Health FSA automatically treat an individual who elects coverage in a HDHP as enrolled in the HSA-compatible health FSA and carry over any unused amounts from the general purpose Health FSA?

Yes. The employee who elects the HDHP health plan for the next year can automatically be treated as having also elected the limited purpose health FSA (or post-deductible health FSA) for the next  year and carry over leftover amounts up to $500 from the general purpose Health FSA.

6. If a cafeteria plan provides that an individual who participates in a general purpose Health FSA that provides for a carryover may decline the carryover for the following year, may the individual decline the carryover and contribute to an HSA during the following year?

Yes. The cafeteria plan may allow the individual to decline or waive the carryover prior to the beginning of the next plan year, and the otherwise eligible individual can contribute to an HSA in the next plan year.

7. If an individual elects to carry over unused amounts from a general purpose Health FSA to an HSA-compatible Health FSA, how do the uniform coverage rules apply during the run-out period of the general purpose Health FSA?

If an individual elects to carry over unused amounts from a general purpose Health FSA to a HSA-compatible Health FSA, the uniform coverage rules may be applied during the run- out period of the general purpose Health FSA as follows:

During the run-out period for the general purpose Health FSA, the unused Health FSA amounts may be used to reimburse any allowed section 213(d) medical expenses incurred prior to the end of the general purpose Health FSA plan year. Any claims covered by the HSA-compatible Health FSA must be timely reimbursed up to the amount elected for the HSA-compatible health FSA plan year. Any claims in excess of the elected amount may be reimbursed after the run-out period when the amount of any carryover is determined.

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