FSA $500 carryover interaction with HSA

04/04/2014

On Friday, March 28, 2014, the Internal Revenue Service (IRS) released much-anticipated guidance on how unused FSA contributions could carryover into the next year without disqualifying an employee from participating in a health savings account (HSA).   Employers were recently given the option to allow their employees to carryover $500 remaining in a general-purpose FSA each year.

Generally, contributions cannot be made to an HSA while an employee still has funds in a general-purpose FSA.  However, participants could have an HSA if they enrolled in a limited-purpose FSA.  The recent IRS guidance allows for FSA contributions to be carried over without losing the ability to contribute to an HSA in the following year if:

  1. An individual who participates in a general purpose health FSA and elects, for the following year, to participate in an HSA-compatible health 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; or
  2. A cafeteria plan that offers both a general purpose health FSA and an HSA- compatible health FSA may automatically treat an individual who elects coverage in an HDHP for the following year as 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 following year; or
  3. A cafeteria plan may provide that if an individual participates in a general-purpose 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 carryover for the following year.

To view the IRS memo: http://www.irs.gov/pub/irs-wd/1413005.pdf