The answer will be different depending upon if the employee has a cafeteria plan with run out, grace period or rollover.
IRS Code § 223(a) allows a tax deduction for contributions to a Health Savings Account (HSA) for an “eligible individual” for any month during the taxable year. An “eligible individual” is defined in IRC § 223(c)(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP (High Deductible Health Plan) on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.”
How can the HCFSA impact HSA eligibility?
The employee is not eligible for an HSA if he/she has disqualifying coverage. The standard Health Care Flexible Spending Account (HCFSA) is considered disqualifying coverage because an employee can be reimbursed tax free for any combination of medical, dental or vision expenses by definition. 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 deposits and/or receive employer contributions to the HSA.
If the employee is a participant in a calendar year cafeteria plan under a Limited Health Care FSA in 2018, they can have a balance on 12/31/18 even if they have grace or rollover because the reimbursements are restricted to dental and vision expenses. This FSA type is compatible with the HSA and the employee is HSA eligible on 1/1/19.
How do cafeteria plan design features like run out, grace period, and rollover impact the participant differently?
The following scenarios assume we are talking about a calendar year cafeteria plan. The employer must adopt one or more of these features as part of the cafeteria plan to be available to the participants. You cannot have both the grace period and rollover for the HCFSA in the same plan. Generally all plans will have a run out to allow for claims processing after the plan year.
Run out period only (no grace or rollover):
The run out period is simply an administrative time to take care of paperwork from the prior plan year. This typically is 3 months from the end of the plan year, but will be specifically defined in the plan. All expenses must be incurred prior to 12/31/18 so there is no conflict with HSA eligibility for 2019.
The employee CAN have a balance on 12/31 in the standard Health Care FSA and file claims through March 2019 for the 2018 plan year without impacting HSA eligibility in 2019.
The grace period is a 2.5 month extension of the old plan year that extends into the new plan where employees can incur and be reimbursed for expenses for both the old and the new plan year during that time. The old plan year balance is exhausted for expenses that occur in the grace period before the new election is used.
If the grace period is triggered because the participant has a balance in their account on the last day of the plan year, the employee will not be HSA eligible until after the full grace period and run out is over, regardless of when the expenses were incurred or when the date they exhaust their balance. HSA eligibility is a monthly determination, so for a calendar year plan ending 12/31 that includes the grace period the employee will not be HSA eligible until 4/1.
Procrastinators beware! Even if the participant incurred all of their expenses in 2018, they are not HSA eligible until 4/1/19 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 2018 to the plan by 12/31, but the expenses are reimbursed on 1/3/19 because of the reimbursement schedule or when the funding is received to process the reimbursement for example, they will not be HSA eligible until 4/1/19.
There is no way for individual participants to convert their standard Health Care FSA to a Limited Health Care FSA during the grace period to avoid HSA eligibility issues. This can only be accomplished if the employer amends the entire plan prior to the end of the plan year, to convert the grace period to only permit Limited Health Care expenses during the grace period.
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 4/1/19. 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 tax free for those expenses with dollars that would be deposited after 4/1/19.
The Rollover feature permits the rollover of up to $500 of HCFSA funds to the next plan year if the participant has a balance in their HCFSA on the last day of the plan year.
If the rollover is triggered, the employee will not be HSA eligible for the entire next plan year (2019) 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 2019, which will result in the rollover dollars going to a Limited Health Care FSA which is HSA compatible.
Employer elects to adopt the auto convert feature for their cafeteria plan, where any employees with balances on the last day of the plan year will have their rollover automatically converted to Limited Health Care FSA.
If the Employee triggers the rollover because they have a balance on 12/31, and the expenses they are reimbursed for during the run out period (1/1-3/31) are for expenses that occurred in 2018 and they completely use up any potential rollover dollars by the end of the run out period. Employees in this situation will become HSA eligible on 4/1/19 after the run out period has closed.
HSA Eligibility Tips for Employees:
- Submit claims early enough in the plan year to be able to avoid the lag time it may take for claims processing. If claims have not been processed and reimbursed by the last day of the plan year, the Rollover or grace period may be triggered which may impact HSA eligibility in the new plan year.
- Use up all funds in the HCFSA by the end of the plan year, making certain their account is at a zero balance by the last day of the plan year and avoid triggering the Grace Period or the Rollover. Employee will be HSA eligible on the 1st day of the plan year.
- If the employee has a balance on the last day of the plan year, try to use up the HCFSA balance during run out with expenses that occurred in the prior plan year. If HCFSA balance is zero at the end of the run out, HSA eligibility is only delayed to the first day of the month following the end of the run out for Grace Period and Rollover.
- Elect the limited HCFSA for the new plan year and any Rollover balances from the prior year, will roll forward to the HSA compatible limited HCFSA, thus making the individual HSA eligible on the first day of the new plan year.
Bottom Line: Any time an individual is covered by a standard Health Care FSA (HCFSA), it results in the individual being disqualified from making contributions (including receiving employer contributions) to their Health Savings Account (HSA). A cafeteria plan with run out only, will not impact HSA eligibility in the next plan year. The HCFSA with grace period may temporarily delay HSA eligibility for those with a balance in their FSA on the last day of the plan year. The HCFSA Rollover however, can potentially impact HSA eligibility for the entire next plan year, depending upon the circumstances. The HCFSA Rollover does not prohibit an individual from participating in or contributing to an HSA forever; however, HSA eligibility may be delayed. Employers looking to add HSAs should carefully review their plan design and communicate to employees in advance to avoid any inadvertent HSA eligibility issues for those that may be enrolled in the standard HCFSA.