How to Avoid Disqualifying Coverage

When offering a health savings account (HSA), there are a few eligibility requirements that employers need to keep in mind for participants looking to transition from their standard health flexible spending account (FSA) to an HSA. To be eligible to make and/or receive contributions to an HSA, a participant must meet the following four criteria. They must:

• Be enrolled in an HSA-qualified high deductible health plan (HDHP) that meets the minimum annual deductible and maximum out-of-pocket expense limit specified by the IRS each year. HDHP requirements can be found on our Plan Limits page.
• Not be another individual’s tax dependent.
• Not be enrolled in Medicare.
• Not be covered by any disqualifying coverage.

Disqualifying coverage refers to any benefit coverage that reimburses participants for general medical expenses before a HDHP minimum deductible is met. A standard health FSA is considered disqualifying coverage, meaning that participants cannot be enrolled in both a standard health FSA and an HSA in the same plan year. Because of this, standard health FSAs with grace period or rollover can delay or prevent a participant from being HSA eligible in their upcoming plan year.

Standard Health FSA with Grace Period

A standard health FSA with a grace period offers participants an extra 2 months and 15 days to incur and be reimbursed for medical claims after the end of their plan year. This grace period is automatically triggered if a participant has any unused FSA funds in their account on the last day of their plan year.

Participants who trigger a grace period with their standard health FSA are considered to have disqualifying coverage and are not eligible to make or receive contributions from an HSA until their 2 month and 15 day grace period has ended.

This means that participants who trigger this grace period are not able to contribute to an HSA until the first of the month following the end of their grace period. For calendar year plans, the earliest that a participant would be eligible to contribute would be April 1st, as shown below.

Participants who are interested in a seamless transition from a plan year with a standard health FSA to a new plan year with an HSA must have a $0 balance in their standard health FSA on the last day of the prior plan year.

Standard Health FSA with Rollover

A standard health FSA with rollover automatically transfers a participant’s remaining FSA funds, up to the statutory limit, to a standard health FSA for their upcoming plan year. This means that a participant with unused FSA funds on the last day of their plan year will automatically be re-enrolled in a standard health FSA for their upcoming plan year.

Once a participant is automatically enrolled in a standard health FSA, they are considered to have disqualifying coverage and are no longer eligible to have an HSA.

This means that participants who trigger their standard health FSA rollover are considered to have disqualifying coverage and are not eligible to make or receive contributions from an HSA in their upcoming plan year, as shown below.

Participants who are interested in a seamless transition from a plan year with a standard health FSA to a new plan year with an HSA must:

• Have a $0 balance in their standard health FSA on the last day of the prior plan year.
  – or –
• If permitted by their employer, have their standard health FSA balance converted to a limited health FSA on the first day of the new plan year.

Some employers also allow a participant in this situation to waive or forfeit their FSA balance in order to participate in a HSA the following year.

Setting Up for Success—The EBC Way

At Employee Benefits Corporation, we are committed to setting our clients up for success. With our mobile app, EBC Mobile, participants can easily track the status of their claims and make sure that all of their FSA funds have been used prior to the end of their plan year. With EBC Mobile, participants can stay on top of their account and not worry about accidentally triggering their grace period or rollover.

For our clients who have a standard health FSA with rollover, we offer an auto-convert feature that can transfer any remaining FSA funds that a participant has into a limited health FSA. Limited health FSAs are not considered disqualifying coverage for HSAs because they only cover dental and vision expenses. This is a great feature for participants who are looking to transition from a standard health FSA to an HSA without losing their FSA funds.

Contact us for more information on how we set up our clients and participants for success.