On March 28, 2014, the Internal Revenue Service (IRS) released an Office of Chief Counsel Memorandum to provide information on how flexible spending account (FSA) carryovers affect eligibility for health savings accounts (HSAs). Although the IRS memorandum is not official guidance, it helps clarify the IRS’ position on the health FSA carryovers and HSA eligibility.
Quick Facts Covered in the Memorandum
- A health FSA may allow for carryovers of up to $500 in unused funds.
- Carryovers under general purpose health FSAs will disqualify individuals from HSA contributions.
- The IRS has provided some carryover options that may preserve HSA eligibility, including carryovers to HSA-compatible FSAs and carryover waivers.
The IRS also notes that an individual who carries over unused funds from a prior year to a current year, under a general purpose health FSA, will not be eligible for HSA contributions for the entire current plan year (even for months after the health FSA no longer has any amounts available to pay or reimburse medical expenses).
However, the memorandum offers some alternative approaches that allow health FSA carryovers while preserving HSA eligibility. These approaches include carrying over unused amounts to an HSA-compatible health FSA and allowing individuals participating in a general purpose FSA to decline or waive the carryover.
Health FSA Carryovers
In general, health FSAs are subject to a “use-or-lose” rule that requires any unused funds at the end of the plan year (plus any applicable grace period) to be forfeited.
Only an eligible individual may establish an HSA and have HSA contributions made on his or her behalf. To be HSA-eligible, an individual must be covered under a high deductible health plan (HDHP).
FSA Carryovers and HSA Eligibility
The IRS memorandum addresses how the carryover of unused amounts under a health FSA from a prior plan year affects and individual’s HSA eligibility during the current plan year.
To get an in-depth clarification of how health FSA carryovers affect HSA eligibility click here. To speak with an Alltrust expert, please call 727.772.4200.