Do you have a health flexible spending account (FSA) or Health Savings Account (HSA)? If so, or if you are investigating these benefit options, the Internal Revenue Service (IRS) has offered some clarification on rules affecting them that will impact many consumers.
Health FSAs generally are subject to a “use-or-lose” rule that says that any funds left unused at the end of the plan year must be forfeited. On Oct. 31, 2013, the IRS relaxed the use-or-lose rule to allow participants to carry over up to $500 in unused funds into the next plan year. The carryover can be used to pay or reimburse medical expenses during the new plan year. Employers can set a lower amount than the $500 maximum, or not allow a carryover at all. Any unused funds in excess of $500 remaining at the end of the plan year will be forfeited.
Only an eligible individual covered under a high deductible health plan (HDHP) can establish an HSA and have contributions made on his or her behalf. Anyone covered by a health FSA is eligible for HSA contributions only if the health FSA is HSA-compatible and not “general purpose” (one that pays or reimburses all qualified medical expenses). The IRS guidelines state that an individual who has coverage under a general purpose health FSA as a result of a carryover is not eligible for HSA contributions during the entire health FSA plan year, even for months after the health FSA no longer has funds available in it.
A person with a general purpose health FSA who chooses a HSA-compatible health FSA for the following year may elect to have any unused amounts from the general purpose health FSA carried over to new health FSA. This individual is eligible for HSA contributions during the following year if he or she meets the other tax rules for eligibility.
Under their cafeteria plans, employers can allow individuals who participate in general purpose health FSAs to decline or waive the carryover for the following year. Individuals who do so will be allowed to contribute to an HSA during the following year. A cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may have an individual who selects coverage in an HDHP for the following year automatically 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 next year.
For more information about FSA carryovers and HSA eligibility, contact The Benefits Firm.
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