In a memorandum released March 28, 2014, the IRS provides guidance for how a health FSA rollover can apply to an employee who would otherwise be eligible to make health savings account (HSA) contributions. The memo addresses the interaction of the cafeteria plan regulations (Code Section 125) and the HSA regulations (Code Section 223).
The guidance covers seven issues (circumstances) that essentially boil down to this.
If an employee participates in a health FSA solely due to dollars that rolled over from the prior plan year, that employee is ineligible to make or receive HSA contributions for the duration of the employer’s cafeteria plan year regardless of when in that plan year the rollover dollars are used.
If that same employee elects to participate in a limited purpose or post-deductible health FSA (both of which are HSA-compatible health FSAs), that employee does not have disqualifying coverage from the FSA and is otherwise eligible to make or receive HSA contributions.
In addition, the employer can adopt a provision whereby an employee who is eligible for rollover and who elects coverage under a high deductible health plan (HDHP) can be automatically enrolled in an HSA-compatible health FSA offered by the employer so that the employee is eligible to make or receive HSA contributions. Or, the employer can adopt a provision whereby the employee can waive the right to receive the rollover dollars, prior to the start of the new plan year, so that there is no disqualifying FSA coverage in the new plan year.
Finally, since the rollover provision does not affect the right of the participant to submit expenses incurred during the plan year during a run out period after the plan year is over, the guidance makes it clear that expenses incurred under a regular health FSA are still eligible for reimbursement using the remaining balance in that health FSA during the run out period even though the employee elected or was placed into an HSA-compatible health FSA for the new plan year.
Employers that have amended their cafeteria plans to adopt the up to $500 rollover or who are contemplating the adoption of the rollover should make sure that they take this guidance into consideration if they also offer HDHP coverage with HSAs.