At the end of last year, the IRS overturned the “use it or lose it” clause that governed flexible spending accounts (FSAs) and instead agreed to allow the holder of those funds – which are earmarked for health-related spending – to carry over some of the money from year to year.
While this allowance is definitely a benefit for employees, it does create a number of questions for HR execs, particularly in terms of how this new FSA policy will impact those also participating in a health flexible spending (HSA) account.
According to a memo sent out by the IRS Office of Chief Counsel, carrying over FSA funds can prevent an individual from participating in a health flexible spending (HSA) account unless your plan offers an HSA-compatible health FSA.
You see, to qualify for an HSA, one of the requirements is that an individual must be covered by a high-deductible health plan (HDHP) and have no other health coverage. However, by nature, a health FSA that pays or reimburses medical expenses, such as insurance copays and deductibles, qualifies as other health coverage.
For those wishing to participate in an HSA, the IRS memo advises that holders not carry over any FSA funds into the next plan year — or make sure carryover funds are deposited in an HSA-compatible FSA. Further, they recommend that employers who offer both a general-purpose health FSA and an HSA-compatible FSA consider automatically placing any FSA carryover funds of HDHP enrollees into the HSA-compatible FSA for the following year. .
However, HR Morning News warns that this is only applicable if your plan has adopted the IRS’ new carryover option AND no longer allows account holders to take advantage of the traditional grace period. Currently, the IRS notes that plans can elect either the carryover or grace period, but not both.
If you have any questions regarding the change in FSA rules, feel free to contact Abel at 609.860.0400.