Can an Employee Become HSA-Eligible During a Health FSA Grace Period?

Typically, individuals are not entitled to contribute to both FSAs and HSAs during the same period.  While FSA funds are subject to a "use if or lose it" rule, participants may receive a grace period during which they can incur medical services and be reimbursed.  That grace period cannot be longer than 2.5 months.  When FSAs offer a grace period, employees with FSA balances on the last day of the FSA's plan year are deemed to have disqualifying coverage until the first day of the first month after the end of the grace period.  Even if the individual has pending claims that have not yet been paid at the end of the plan year, those claims are not considered.  Employees with a zero FSA balance at the end of the plan year are considered HSA eligible at the start of the new year regardless of the grace period option.  The employee is not entitled to simply forfeit their existing FSA balance in order to become HSA-eligible.  For more information on the interaction between HSAs and FSAs, visit Tax Facts Online. Read More: Link to Q445.  Note: Q is updated.