IRS guidance for resolving FSA carryover and HSA compatibility issues

On March 28, 2014, the IRS issued a memorandum to provide guidance in response to Health Savings Account (HSA) compatibility issues presented by the $500 optional carryover of Flexible Spending Account (FSA) funds.

In order for people to be eligible to contribute to an HSA, they must have qualifying High Deductible Health Plan Coverage (HDHP) as well as no other health insurance coverage that covers any expense also covered under the HDHP. A general purpose FSA that covers all medical expenses would be considered other coverage, and would disqualify an individual for contributions to an FSA. Read more about FSA and HSA compatibility on our blog.

The memorandum clarifies these issues, advising that for an individual with an FSA carryover who would otherwise be eligible to participate in an HSA as of the start of the following year.

The employer can allow the individual to do one of two things:

  1. Opt out of the carryover altogether, or
  2. Carryover the remaining FSA funds into a Limited, HSA-compatible FSA

Some administrators may have presumed that these options would be possible prior to this memorandum, but having the reassurance that this is permitted is certainly welcomed and appreciated guidance.

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