The IRS issued guidance (Chief Counsel Memo #201413005) on Friday, March 28, 2014, addressing the issue of health FSA carryovers* and eligibility for an HSA.**
While the information below may seem to indicate specific IRS positions, it is important to be aware that this particular “advice” may not be cited as precedent.
In this content:
o FSA signifies a general purpose health Flexible Spending Account.
o HSA signifies a Health Savings Account.
o HSA-compatible health FSA signifies a limited purpose Flexible Spending Account (i.e. dental & vision).
1. When covered by a health FSA*** that pays or reimburses all qualified medical expenses, an individual may not contribute to an HSA.*** This includes an individual who has coverage solely as the result of a carryover of unused funds from the prior year.
2. When covered by a health FSA that pays or reimburses all qualified medical expenses, an individual may not contribute to an HSA during the entire plan year of the health FSA. Further, an individual covered by a health FSA solely as the result of a carryover of unused funds may not contribute to an HSA, even after the health FSA is depleted (no funds available to pay or reimburse medical expenses).
3. When participating in both a health FSA and an HSA-compatible health FSA, an individual may carry over to the latter (HSA-compatible health FSA) any unused health FSA funds. Conversely, the carryover may not be transferred to a non-health FSA or other type of cafeteria plan.
4. When participating in both a health FSA and an HSA-compatible health FSA—with unused health FSA funds carried over to the HSA-compatible health FSA—an individual may contribute to an HSA the following year.
5. When a cafeteria plan offers both a health FSA and an HSA-compatible health FSA, an individual with coverage in an HDHP (a) may be automatically enrolled in the HSA-compatible health FSA, and (b) may carry over any unused health FSA funds to the HSA-compatible health FSA.
6. When participating in a health FSA that provides for a carryover of unused funds, an individual may decline or waive the carryover for the following year. If waived, the individual may contribute to an HSA during the following year.
7. When an individual carries over unused health FSA funds to a HSA-compatible health FSA, the uniform coverage rules may be applied during the run-out period, as follows. (a) During run-out, the unused health FSA funds may be used to reimburse any allowed Sec. 213(d) medical expenses incurred prior to the end of the plan year. (b) 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. (c) Any claims exceeding the elected amount may be reimbursed after the run-out period (at which time the amount of any carryover is determined).
* Per Notice 2013-71 (dated Oct. 31, 2013): a cafeteria plan may provide for the use of up to $500 of any amount remaining unused in a health FSA in the immediately following plan year.
** Per Sec. 223 of the Code, an individual who is eligible to contribute to an HSA (a) must be covered by a High Deductible Health Plan (HDHP), and (b) also may have permitted insurance, certain disregarded coverage, and preventive care (without a deductible), but no other coverage.
*** A health FSA that reimburses all qualified Sec. 213(d) medical expenses, without restrictions, is considered to be a health plan that constitutes other coverage. Consequently, an individual covered by a health FSA is not eligible to makes contributions to an HSA.