by Teri Lowder, Director of Compliance
Since the inception of Health Savings Accounts (HSAs) in 2004, employers, brokers, and members have struggled with how to manage their company’s Flexible Spending Account (FSA) for healthcare along with the new opportunity to add a HSA compatible high deductible health plan coupled with a HSA – and take advantage of all the tax savings these two vehicles allow.
The IRS came out with some very difficult-to-understand “stacking rules” in 2004, pertaining to how this could be accomplished. This left few options other than terminating the healthcare FSA, or amending the plan to allow a limited purpose or post-deductible FSA. Well, relief is in sight! With the ability to rollover $500 at the end of the plan year on the healthcare FSA, additional guidance – favorable to the HSA- has arrived.
The new FSA $500 carry-over option fits nicely with a HSA. One can move from a full healthcare FSA to a new HSA without violating any IRS rules. Remember, you cannot have a full healthcare FSA and an HSA; the FSA must be limited to dental and vision only, or post-statutory deductible. The guidelines offer the following options:
- An individual whose healthcare FSA has unused amounts may elect to carry over up to $500 of those funds into a limited purpose or post-deductible FSA, if the employer offers that option. These types of accounts are HSA-compatible, and would not interfere with HSA eligibility, allowing an individual to contribute to a HSA as well as to keep the unused FSA funds.
- An employer can structure their benefit plan to automatically carry over up to $500 of unused healthcare FSA funds into a limited purpose or post-deductible FSA for individuals who choose an HSA-eligible high deductible health plan for a small additional fee. This also allows the employee eligibility to contribute to an HSA and to keep the unused FSA funds, with the benefit of requiring no action on the employee’s part.
- An individual with unused healthcare FSA funds may also choose to forfeit those amounts. This will allow an individual with a very small healthcare FSA balance to become HSA-eligible, without any transition to a different type of account.
- Any individual who is covered by a healthcare FSA, as a result of a carry-over of unused amounts from the prior year, and who does not elect to carry over into a limited purpose or post-deductible FSA, is ineligible to contribute to an HSA for the entire plan year, even if the carried over funds are exhausted before the end of the plan year.
Contact us with any questions, or phone 800.617.4729.