IRS Provides Guidance On Health FSA Carryovers And HSA Eligibility

In Notice 2013-71, the Internal Revenue Service modified health flexible spending arrangements’ (health FSAs) use-it-or-lose-it rule, and now allows employers to amend their cafeteria plans to provide for the carryover of up to $500 in unused health FSA contributions to the immediately following plan year. While Notice 2013-71 provided a much-wished-for easing of the use-it-or-lose-it rule, it has provided for some confusion for employers who have both a high-deductible health plan (HDHP) with a health savings account (HSA) and a health FSA with a carryover feature. The IRS Office of Chief Counsel has issued Memorandum 201413005 to answer some questions concerning the health FSA carryover and HSA eligibility.

Employees are only allowed to contribute to an HSA if they are enrolled in an HDHP and not covered under any other health plan. A health FSA that reimburses Sec. 213(d) expenses is considered a health plan that constitutes other coverage, and so individuals covered by a health FSA that pays or reimburses qualified medical expenses are not eligible to make contributions to an HSA.

The memorandum provides the following guidance to help employers deal with having both an HSA and a health FSA with carryover feature:

1. An individual who is covered by a health FSA is not an eligible individual for purposes of making contributions to an HSA. This includes individuals who have coverage in a general purpose HSA solely as a result of a carryover of unused amounts in a health FSA from the prior year.

2. An individual covered by a general purposed 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 funds available to pay or reimburse medical expenses.

3. An individual who participates in a general purpose health FSA, and elects for the following year to participate in an HSA-compatible health FSA (such as a limited purpose health FSA, a post-deductible health FSA, or a combination of both), may elect to have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA. The IRS Chief Counsel noted that there is no requirement that the unused amounts in the general purpose health FSA only be carried over to another general purpose health FSA; however, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.

4. The individual in example 3, who elects to carryover amounts from a general purpose health FSA to a HSA-compatible FSA, is eligible to contribute to an HSA during the following year if the individual is otherwise eligible to contribute to an HSA.

5. A cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may automatically treat an individual who elects coverage in a high-deductible health plan (HDHP) for the following year as enrolled in the HSA-compatible health FSA and carry over any unused amounts from a general purpose health FSA to the HSA-compatible health FSA for the following year.

6. If an individual who participated in a general purpose health FSA that provides for a carryover of unused amounts, the individual may decline or waive the carryover for the following year. In that case, the individual may contribute to an HSA during the following year, if the individual is otherwise eligible to contribute to an HSA.

7. If an individual elects to carryover 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. During the run-out period, the unused health FSA amounts may be used to reimburse Sec. 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. The memo provides a detailed example of how this provision should work.

For more information, visit http://www.irs.gov/pub/irs-wd/1413005.pdf.

For more information, visit http://www.irs.gov/pub/irs-drop/n-14-23.pdf.

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