Health Care FSA Rollover’s Impact on HSA Eligibility

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When an employer is implementing a Health Savings Account (HSA) qualified high deductible health plan (HDHP) for the first time, or when they offer it as one plan option among many, it is important for employees to understand how other coverage can impact their HSA eligibility. This includes plans from the prior plan year that extend benefits into the new plan year, such as a standard Health Care Flexible Spending Accounts (HCFSAs) with either grace periods or rollover. In this article, we will be discussing what participants need to know when they are enrolling in an HSA qualified HDHP and previously had a standard HCFSA with rollover in the prior plan year.

Background:

In order to be eligible to make or receive contributions to an HSA, an employee must (1) be enrolled in a HSA qualified HDHP, (2) not be another individual’s tax dependent, (3) not be entitled to (enrolled in) Medicare, and (4) not be covered by any disqualifying coverage.  In addition, eligibility to make HSA contributions is based on the status of the individual as of the 1st day of the month. If an employee makes or receives HSA contributions above what is permitted due to their eligibility status, they will be subject to income tax and a 6% excise tax on the excess contribution.

Because standard HCFSAs may reimburse participants for general medical expenses, they are classified as disqualifying coverage. If a participant is enrolled in a limited-purpose HCFSA, it would not be classified as disqualifying coverage, because reimbursement is restricted to dental and vision expenses.

It is important to keep in mind that participation in the standard HCFSA is disqualifying coverage for the entire plan year, regardless of when the participant exhausts their balance.

Impact of Standard Health Care FSA with Rollover:

A standard HCFSA which offers rollover provides participants the ability to transfer up to $500 of unused funds from one plan year to the next. Any funds left in a HCFSA participant’s account on the last day of the plan year will trigger rollover. If any funds are rolled into the new plan year at the end of the runout period, and remain in a standard HCFSA, this is considered disqualifying coverage for the entire plan year.

The rollover funds will continue to be disqualifying coverage for the entire plan year if any of the funds are used to reimburse a claim in the new plan year, regardless if the claim is for a medical service or a service such as dental or vision expenses. This is true even if the participant exhausts their balance prior to the end of the plan year.

If however, the entire rollover balance is exhausted during the claims runout period on claims from the prior plan year, the HCFSA will cease to be disqualifying coverage as of the first of the month following the end of the runout period.

With rollover, if an employer offers a limited HCFSA, employees can elect the HSA compatible limited HCFSA for the new plan year. Any rollover dollars would roll into the limited HCFSA, and would no longer be considered disqualifying coverage.

During the time in which a participant has disqualifying coverage, they become ineligible to make contributions up to the full, annual IRS limit (for 2020: $3,550 for single coverage, $7,100 for family coverage, $1,000 catch up contribution for those 55 and older). For a participant under the age of 55 with single coverage who becomes HSA eligible on April 1, 2020, the maximum they can contribute is $2,662.50 ($5,325 for family coverage). Note: Under the full contribution rule, the participant would be eligible to contribute the full annual maximum based on their enrollment as of the first day of the last month of the taxable year (typically 12/1) provided they remain HSA eligible for that month plus the following 12 months after the end of the tax year (testing period).

Case Study:

For groups that have a standard HCFSA only with a Plan Year that runs from January 2019 – December 2019 with rollover:

If a participant has a $0 account balance as of 12/31/2019:

They can contribute to an HSA beginning 1/1/2020.

If a participant has an account balance (even $0.01) as of 12/31/2019, there is money in the standard health FSA that will roll over into a standard health FSA for 2020:

 

  • If the participant submits 2019 claims during the runout period and exhausts the FSA prior to the end of the runout period (3/31/2020).
  • They can contribute to the HSA beginning 4/1/2020.  (The first of the month following the runout period.)
  • If the participant submits 2019 claims during the runout period, along with one 2020 claim and exhausts the standard health FSA prior to the end of the runout period (3/31/2020).
  • Because the participant had other first-dollar coverage in the 2020 plan period, they are no longer eligible to contribute to the HSA in 2020.  They must wait until 1/1/2021.
  • If any money is available in the standard health FSA beyond the end of the runout period, the account would need to be reanalyzed based on the above criteria annually to determine when they would become eligible to contribute to the HSA.

 

 

What Can Brokers and Employers do to Assist Participants?

First and foremost, it is important to educate plan participants as to the rules related to making HSA contributions. It is important for them to understand that they must exhaust their standard HCFSA prior to the end of the plan year in order to be eligible for contributions into an HSA as of the first of a new plan year, unless a limited HCFSA is available to them. This means that claims must be processed and paid, not just submitted to their claims administrator.

Employers can also consider alternatives in order to ensure as many of their plan participants remain HSA eligible as possible.

  1. Amend their FSA prior to the end of the plan year to remove the rollover from the standard HCFSA. (Grace period can remain on the Dependent Care FSA if applicable.)  Keep in mind that some participants may be counting on the rollover. Removal of the rollover would not constitute a qualifying event where the participant can change their election, which may result in a forfeiture for the participant.
  2. Amend their FSA prior to the end of the plan year to require a new plan year election in order to receive rollover funds. This would protect a participant who wants to contribute to an HSA, who didn’t exhaust their balance in the prior plan year.
  3. Amend their FSA prior to the end of the plan year to require a minimum amount to rollover (i.e. $50 for example).  This would protect some participants who wants to contribute to an HSA, who did not exhaust a small remaining FSA balances in the old plan year.
  4. Amend the FSA to offer a limited HCFSA alongside of the standard HCFSA. Employees who elect a limited HCFSA for the new plan year will have any unused funds roll into the limited-purpose account. This helps ensure HSA eligibility.

Employee Benefits Corporation offers a unique cafeteria plan feature referred to as “Auto Convert”. This helps protect HSA eligibility for employees who do not make an election for the new plan year, by rolling them into the limited HCFSA automatically.

What Should Participants Do?

Participants in a standard HCFSA with rollover should be mindful of their account balances. They should submit claims as early as possible to ensure they are processed and paid out of their accounts prior to the end of the plan year. If participants are unable to bring their account balance to zero prior to the end of the plan year, they should be aware that they would not be eligible to contribute or receive contributions into their HSA until they no longer have disqualifying coverage.

Participants can avoid loss of eligibility due to rollover if their plan offers a limited HCFSA and the participant elects that for the new plan year.

Participants should also be mindful that if their spouse has a standard HCFSA or a standard HCFSA with grace period, the same eligibility rules would apply as if it were their own.

What can Employee Benefits Corporation Do to Assist?

When an employer has both Employee Benefits Corporation’s BESTflex Health Care FSA as well as our SimplyHSA administration, Employee Benefits Corporation will watch for participants who are enrolled in the HCFSA (including rollover) who also establish a HSA. In addition, as mentioned above, Employee Benefits Corporation can offer employers a cafeteria plan feature called Auto Convert, which helps protect the HSA eligibility of their participants by converting elections to a limited HCFSA when no new election is made (if HSA administration is elsewhere) or if the participant establishes a SimplyHSA with Employee Benefits Corporation.

Contact our Sales Team or your Client Service Consultant for more information.

Read More!

Please review our other recent articles on other benefits that have an impact on HSA eligibility.

Medicare Enrollment's Impact on HSA Eligibility

Your Spouse's Health Care FSA's Impact on HSA Eligibility

Health Care FSA Grace Period's Impact on HSA Eligibility

Categories: Benefits in General, Compliance | Tags: HSA , Health Savings Accounts , Flexible Spending Account , FSA , Health Care FSA , Rollover | Return