Yeah, it should be simple. First we had the FSA. Then we had the HSA. Then we had the IRS say that an FSA had to be limited to dental and vision while the HSA could cover medical, dental and vision all together. Then the government said we could have grace periods of up to ten weeks for the FSA. That wasn’t too hard, but there were some unanswered questions. Then the government decided that a grace period wasn’t enough, and now employers have the option of rolling over $500 of unused funds to the next plan year. Finally the IRS decided they had had enough…and had to step in and provide a slew of rules (oh boy):
- Individual covered by general health FSA (bureau speak for regular old FSA) may not make contributions to an HSA (yes, we already knew that). This includes, however, someone who has coverage in an FSA solely as the result of a carryover of unused amounts in a health FSA from the prior year
- Individual covered by general health FSA solely as the result of a carryover of unused amounts in the FSA from the previous year 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
- Individual who participates in general health FSA and elects, for the following year, to participate in an HSA compatible limited purpose FSA (meaning dental and vision only) may choose to have any unused amounts from the general health FSA carried over to the HSA compatible limited purpose health FSA. There is no requirement that the unused amounts in the general health FSA only be carried over to a general health FSA
- Individual who participates in general health FSA and elects, for the following year, to participate in an HSA compatible limited purpose FSA and have any unused amounts from the general purpose health FSA carried over to the HSA compatible health FSA is eligible to contribute to an HSA during the following year if the individual is otherwise HSA eligible
- A cafeteria plan that offers both a general health FSA and an HSA compatible limited purpose health FSA may be drafted or amended to automatically treat an individual who elects coverage in a High Deductible Health Plan for the following year as enrolled in the HSA compatible limited purpose health FSA and carry over any unused amounts from a general health FSA to the HSA compatible limited purpose health FSA for the following year
- A cafeteria plan may be drafted or amended to provide that if an individual participates in a general health FSA that provides for a carryover of unused amounts, the individual may elect prior to the beginning of the following year to decline or waive the FSA carryover for the following year. In that case, the individual who declines the FSA carryover under the terms of the Cafeteria Plan may contribute to an HSA during the following year if the individual is otherwise HSA eligible
Got it? Yes, it’s complicated. We are ready to help you as soon as we decipher it.