Carryover Confusion: Chief Counsel Clears Up Rules on Health FSA Carryovers

Earlier this year, I blogged about how the IRS modified the health flexible spending account (“health FSA”) “use-it-or-lose-it” rule to allow carryovers of up to $500 to subsequent plan years.  This rule change caused some confusion.  Employers were asking, “what happens to an employee’s eligibility to contribute to a health savings account (“HSA”) if they have a carryover from a general purpose health FSA?”  The answer was that because a general purpose health FSA is considered “other coverage,” participation in a general purpose health FSA renders an individual ineligible to contribute to a HSA.  But employers still needed guidance on ways to handle health FSA carryovers for employees who also wanted to contribute to a HSA in the following year.  Could the employee waive the carryover amount?  Could the employee transfer the carryover to a HSA-compatible health FSA?

In order to provide some guidance on the issue, the IRS Office of the Chief Counsel issued Chief Counsel Advice Memorandum 201413005.  The memorandum analyzes several fact patterns related to health FSA carryovers and HSA eligibility and concluded the following:

• An employee covered by a general purpose health FSA as a result of a carryover is ineligible to contribute to a HSA, even for the months in the plan year after the carryover funds have been completely depleted.
• An employee can carryover amounts from a general purpose health FSA into a HSA-compatible health FSA for the following year.  This would allow the employee to contribute to a HSA if he or she was otherwise eligible.  Note that carryover amounts cannot be carried over to a non-health FSA or any other type of cafeteria plan benefit.
• An employer that offers both a general purpose health FSA and a HSA-compatible health FSA can automatically treat an employee who enrolls in a high deductible health plan for the following year as enrolled in the HSA-compatible health FSA and carryover any amounts from a general purpose health FSA to the HSA-compatible health FSA.
• A cafeteria plan may provide that an employee can elect prior to the beginning of the following year to decline or waive the carryover of general purpose health FSA amounts for the following year.  As a result, the employee would be eligible to contribute to a HSA if he or she was otherwise eligible.

For a copy of the Chief Counsel Advice Memorandum click here.