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Health FSAs: Impact on HSA Eligibility

 August 26 2019     Diane Cross

With open enrollment season upon us, the opportunity is ripe for individuals to decide to change elections to a High Deductible Health Plan (HDHP) and open a Health Savings Account (HSA). With that in mind, this is an ideal time to review the nuances of how Health Flexible Spending Account (FSA) coverage - specifically with a grace period or carryover provision - can impact HSA eligibility.  

Background
The IRS provides that to be eligible* for an HSA you must not have any disqualifying coverage. Notably, disqualifying coverage includes FSAs (with some exceptions). Generally, an individual who is covered by a general-purpose FSA is ineligible to make HSA contributions for the entire period of coverage under the FSA — and this is even after the individual has exhausted the FSA account balance. Like many rules, there are exceptions. For example, certain FSAs will not prevent HSA eligibility, including:

  • Limited-purpose FSA: Provides coverage for eligible vision and dental expenses only
  • Post-deductible FSA: Provides coverage for qualified medical expenses after the IRS’s minimum HDHP deductible is met

Grace Period & Carryover Provisions
While this may seem straight forward, employers who offer both an FSA and an HSA are sometimes unaware that HSA eligibility can be impacted for individuals who were previously enrolled in an FSA. For example, if an FSA has a grace period or carryover provision – the impact to HSA eligibility may continue into the subsequent plan year. 

  • Grace Period: Allows participants to utilize the FSA funds for an extended period of coverage - up to an additional two-and-a-half months after the close of the plan year
  • Carryover: Allows for up to $500 of unused funds to be carried over to the subsequent plan year

Let’s say there is an employee during the 2019 calendar plan year who is enrolled in a general-purpose FSA. During open enrollment, that employee decides to enroll in an HDHP for the 2020 plan year and open an HSA.  It is often incorrectly assumed that the prior FSA coverage will not impact HSA eligibility. This is not always true. Here are some important considerations:

  • If the FSA offers a grace period, there are nuances to HSA eligibility. If there is a balance at the end of the FSA plan year, an individual is not eligible for an HSA in the subsequent year until the first calendar month after the end of the grace period (e.g. April 1st for a calendar-year plan with a grace period ending March 15th). But, IRS guidance explains that if there is a zero-dollar balance at the end of the FSA plan year, HSA eligibility is not impacted in the subsequent plan year. 
  • If the FSA offers a carryover provision, the individual is not HSA eligible for the entire subsequent plan year. However, if the FSA is converted to a limited purpose FSA or if the individual declines the carryover prior to the start of the plan year (to decline the carryover, the plan must allow for it), the carryover provision will not prohibit HSA eligibility. It is also presumed that HSA eligibility is not impacted if a plan permits a carryover, but the participant has a zero-dollar balance at year-end.

What may seem to be a way to help participants maximize their FSAs, a grace period or carryover provision could also prevent HSA eligibility longer than intended and impact plan administration.  That said, employers should be mindful of the implications on subsequent HSA eligibility. It is important not only for purposeful plan design choices, but also for employers who offer both FSAs and HSAs to communicate any impact to HSA eligibility during open enrollment. This article provides a summary overview of FSA coverage's impact on HSA eligibility, specific to grace period and carryover provisions. For additional information, please contact your HORAN representative with any questions.

*Other requirements for HSA eligibility include: being enrolled in a High Deductible Health Plan, and not being enrolled in Medicare or an eligible tax dependent of someone else.