It does seem to be a case of the adage: "Be careful what you wish for." While the IRS finally agreed to allow health flexible spending account (FSA) holders to carryover some funds from year to year -- that means those employees cannot also participate in a Health Savings Account (HSA). It is either/or. The only exception is if your cafeteria plan offers an HSA-compatible health FSA, which tend to cover dental, vision, and some preventive care and pharmaceutical expenses not covered under a health insurance plan, according to a memorandum from the IRS Office of Chief Counsel.
Be careful what you wish for. FSA carryovers now prevent HSA participation.
In order to qualify for an HSA, an employee must be covered under a high-deductible health plan (HDHP) and have no other health coverage, among other requirements.
A general FSA is considered "other health coverage," disqualifying your employees from HSA participation for the entire plan year.
You can access the IRS memorandum here.
Even if all your employee has in the FSA is a carryover balance from the year before, they are still disqualified from participating in an HSA for the plan year.
Even if all your employee has in the FSA is a carryover balance...they are still disqualified...
IRS Advise: if your employees want to participate in an HSA, advise them to not carryover any FSA funds into the next plan year -- or make sure the carryover balance is deposited in an HSA-compatible FSA.
If your cafeteria plan offers both a general-purpose health FSA AND an HSA-compatible FSA, you may automatically place any FSA carryover funds of HDHP enrollees into the HSA-compatible FSA for the following year.
This all assumes, of course, that your plan has adopted the IRS' new carryover option -- and no longer allows employee account holders to take advantage of the traditional grace period. The IRS allows your plan to select either the carryover option or the grace period -- not both.
Rylan Klaseen & Associates
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