445 / Can participation in a health FSA impact an individual’s ability to contribute to an HSA?

GCM 201413005 states that carrying over FSA funds from year one to year two will prevent an individual from participating in a health savings account (HSA) in year two. HSA-eligible individuals must have qualifying high-deductible health plan (HDHP) coverage and no non-HDHP coverage other than permitted insurance, coverage providing only certain types of preventive care, or coverage with a deductible that equals or exceeds the statutory minimum annual HDHP deductible (collectively, HSA-compatible coverage). Unused amounts from a general-purpose health FSA that could be carried over to an HSA-compatible health FSA may be used during the general-purpose health FSA’s run-out period to reimburse expenses covered by the general-purpose health FSA that were incurred during the previous plan year.

Planning Point: Note that if the FSA participant has a zero-dollar balance at the end of the FSA’s plan year, that individual may be HSA-eligible on the day following the end of the FSA plan year even if the FSA offers a grace period.

A health FSA that reimburses all qualified Section 213(d) medical expenses without other restrictions is a health plan. Consequently, an individual who is covered by a general purpose health FSA that pays or reimburses qualified medical expenses is not an eligible individual for purposes of contributing to an HSA. This disqualification includes the entire plan year, even if the health FSA has paid or reimbursed all amounts prior to the end of the plan year. To prevent this, an individual may decline or waive a health FSA carryover in order to become eligible for the HSA, at least if the FSA plan permits.

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. In that case, the individual who declines under the terms of the cafeteria plan may contribute to an HSA during the following year if the individual is otherwise eligible for the HSA.

However, if a cafeteria plan offers an HSA-compatible (limited purpose) health FSA, (i.e., one that covers, dental, vision, preventive care, and/or pharmaceutical expenses not covered under a health insurance plan) this does not prohibit funding an HSA. Thus, individuals wishing to participate in an HSA should either not carryover any FSA funds into the next plan year or make sure carryover funds are deposited in an HSA-compatible FSA (i.e., one that provides solely incidental benefits or reimburses other medical expenses after the deductible is met). There is no requirement that the unused amounts in the general purpose health FSA only be carried over to a general purpose health FSA. However, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.