When it comes to tax-advantaged spending accounts, the eligibility rules can be a source of confusion for employees. If an employer offers an HSA-qualified high-deductible health plan (HDHP), employees should review their health coverage to understand how it impacts their HSA eligibility.
Here’s a common question that comes up during open enrollment about HSA eligibility.
If an employee is enrolled in a flexible spending account (FSA) and wants to enroll in an HSA at open enrollment, what happens if the employee already has an FSA with a grace period or rollover?
General HSA Eligibility
First and foremost, FSA enrollment is irrevocable for the entire plan year without a qualifying event. Enrolling in an HSA is not considered a qualifying event. Therefore, employees are not eligible to contribute to an HSA if they are already enrolled in an FSA. Although someone can enroll in an HDHP, they must be HSA-eligible in order to open an HSA. An employee cannot drop their FSA midyear in response to an employer’s midyear offering of an HDHP. Therefore, enrolling in the HSA is not an option for them until the FSA plan year ends.
FSA with a Grace Period
A grace period is a two and a half month period following the end of the plan year, during which employees can still incur eligible expenses and use any remaining funds in their account to cover those expenses
If the FSA has a grace period and the employee has no funds remaining in the FSA at the end of the plan year, then the employee may begin contributing to the HSA at the beginning of the new plan year. However, if the employee has any funds remaining in their FSA at the end of the plan year, then they must wait until the grace period ends to begin contributing to an HSA. The employee will be eligible to begin contributing to the HSA at the beginning of the following month.
Employees cannot decline the grace period in order to start contributing to an HSA earlier.
Note: Due to COVID-19 legislation, some employers have extended their grace periods beyond the standard 2.5 timeframe. This would further delay an employee’s HSA eligibility. In this scenario, the earliest an employee would be eligible to contribute to an HSA is one month after the end of the grace period.
FSA with a Rollover
The FSA rollover provides a measure of relief to FSA participants by giving them the ability to roll over up to $570 (new limit for the 2022 plan year) of unused funds to the next plan year.
If an employee rolls over any unused FSA funds to the new plan year, they would not be eligible to enroll in or contribute to an HSA. In order to be HSA eligible, the employee would need to spend all of their FSA funds by the end of the plan year or transfer the FSA funds to a limited purpose FSA. Converting funds from an FSA to a limited purpose FSA can only be done if there is a balance at the end of the current FSA plan year. Additionally, the employee can decline participation in the rollover in order to begin contributing to the HSA at the start of the plan year.