That depends. The answer will be different if the employee has a cafeteria plan with run out, grace period or rollover.
The issue is whether or not the employee has disqualifying coverage that will impact HSA eligibility. An employee can be enrolled in the High Deductible Health Plan (HDHP) if the employee has disqualifying coverage, however based upon the scenarios outlined below, the employee may or may be eligible to open an HSA and make deposit or receive employer contributions.
Assuming we are talking about a calendar year cafeteria plan.
- If the cafeteria plan does not have grace period or rollover, the employee CAN have a balance on 12/31 in the regular Health Care FSA and file claims through March 2017 for the 2016 plan year without impacting HSA eligibility in 2017. The run out period is simply an administrative time to take care of paperwork from the prior plan year. All expenses must be incurred prior to 12/31/16 so there is no conflict with HSA eligibility for 2017.
- If the employee is a participant in a Limited Health Care FSA in 2016, they can have a balance on 12/31/16 even if they have grace or rollover because the reimbursements are restricted to dental and vision expenses. This is compatible with the HSA and the employee is HSA eligible on 1/1/17.
However, if the employee is participating in the regular Health Care FSA for 2016, the balance needs to be $0 on 12/31 for the employee to be HSA eligible on 1/1 if the plan has the grace period or rollover.
If the employee has any balance in their account at midnight on the last day of the plan year (12/31) that has a grace period or rollover, that will trigger either the full grace period or rollover (depending upon what provision they have in their particular plan).
So regardless of when the expenses were incurred (procrastinators should take notice) or whether we received the request for reimbursement prior to 12/31, having a balance on 12/31 will trigger the full grace period or rollover into 2017.
What does that mean for the participant?
Run out only (no grace or rollover):
The employee CAN have a balance on 12/31 in the regular Health Care FSA and file claims through March 2017 for the 2016 plan year without impacting HSA eligibility in 2017. The run out period is simply an administrative time to take care of paperwork from the prior plan year. All expenses must be incurred prior to 12/31/16 so there is no conflict with HSA eligibility for 2017.
If the grace period is triggered, they will not be HSA eligible until after the full grace period and runout is over, regardless of when the expenses were incurred or when they exhaust their balance. HSA eligibility is a monthly determination. For a calendar year plan that means they are not eligible until 4/1.
- Even if the participant incurred all of their expenses in 2016, they are not HSA eligible until 4/1/17 if they failed to get claims filed and reimbursed to them by 12/31, so their balance was $0 on 12/31.
- If the participant submitted their claims for 2016 to the plan by 12/31, but the expenses are reimbursed on 1/3/17 because of the reimbursement schedule for example, they are still not HSA eligible until 4/1/17.
- There is no way for individual participants to convert their regular Health Care FSA to a Limited Health Care FSA during the grace period to avoid HSA eligibility issues. This could only be accomplished by the employer amending the entire plan to convert the grace period to be Limited Health Care grace period. This would have needed to be done before 12/31/16.
Assuming that the employees HSA eligibility is delayed, the employee and employer should be aware that this would mean that the employee is not eligible to open a HSA, make deposits or receive employer contributions until at least 4/1/17. That will also mean that expenses that occur prior to the opening of the HSA will not be eligible for the employee to use HSA dollars for those expenses with dollars that would be deposited after 4/1/17.
If the rollover is triggered, they will not be HSA eligible for the entire next plan year (2017) regardless of when the rollover balance is exhausted, unless one of the following occurs:
- Employee enrolls for at least $1 in a Limited Health Care FSA for 2017, which will result in the rollover dollars going to a Limited Health Care FSA which is HSA compatible
- Employee triggers the rollover because they have a balance on 12/31, however, the expenses they are reimbursed for during the runout period (1/1-3/31) are for expenses that occurred in 2016 and they completely use up any dollars that could have rolled over by the end of the runout period. Employees in this situation will become HSA eligible on 4/1/17 after the runout period has closed.
Bottom Line: If the intention is to implement an HSA in the future, the employer should review the current cafeteria plan design. If the grace period or rollover is included in an existing cafeteria plan and they intend to move to an HSA design in the next cafeteria plan year, it is important to communicate to current Health Care FSA participants the importance of a $0 balance on the last day of the plan year in order to preserve HSA eligibility at the start of the next cafeteria plan year.