By Ben Cohen, courtesy of SBAM Approved Partner Kushner & Co.
Recent guidance in the form of a Memo from the IRS’ Office of the Chief Counsel from February 24, 2014, provided additional direction on the interaction between Health Savings Accounts (HSAs) and Health Flexible Spending Accounts (FSAs).
The Memo primarily dealt with how the new Carryover provision available for FSAs would impact eligibility to make or receive contributions to an HSA. However, it also serves as a good opportunity to cover an area that creates constant confusion from clients and participants – the restriction on contributions to an HSA when enrolled in a health plan that is not a qualified High Deductible Health Plan (HDHP), including general-purpose Health FSAs.
To put it as simply as possible, an employee cannot contribute or receive employer contributions to their HSA when enrolled in any health plan that is not a qualified High Deductible Health Plan. This includes:
- Enrollment in another health plan that isn’t a Qualified High Deductible Health Plan (e.g. a spouse’s regular group health plan that isn’t an HDHP)
- Enrollment in a general-purpose Health FSA. This includes enrollment by either the employee and/or their spouse.
- Enrollment in a general-purpose Health FSA in the immediately-previous year, and the plan has a Grace Period (allowing employees to continue to incur expenses against the previous year’s balance). If an employee still has a balance going into the Grace Period, they are restricted from contributions to the HSA until the end of the Grace Period, usually no more than 2-½ months after plan year end.
- Enrollment in a general-purpose Health FSA in the immediately-previous year, and the plan has the new Carryover provision (allowing employees to Carryover up to $500 into the plan year). If there are Carryover funds, and the plan remains a general-purpose Health FSA the employee is restricted from contributions to the HSA for the entire plan year. Employees can, however, waive their Carryover or change it to a limited-purpose FSA, such as for dental or vision expenses only (if the plan allows).
It’s important to note that an IRS Memo is not “official guidance”, but in the absence of formal guidance it is prudent to use as a guide to the Agency’s thinking. This is an area fraught with potential compliance issues for your employees (whether they know it or not). Ensuring proper communication about the rules will help minimize their exposure. There are many different situations that may arise for you and your employees. As formal guidance becomes available, we’ll provide more information at that time.