The FSA carryover feature announced by the IRS in October of last year was a welcome enhancement for many employers; however, it left unanswered questions about whether a carryover (of a year-end FSA balance of up to $500) would disqualify an otherwise eligible individual from participating in an HSA in the following year.
In an internal Office of Chief Counsel memo (number 201413005) that was released last week - http://www.irs.gov/pub/irs-wd/1413006.pdf - the IRS answers that question by outlining three ways in which a general purpose FSA participant who is eligible to carry over unused FSA funds to the following year may participate in an HSA:
- Individual election of carryover to limited purpose FSA. A general purpose FSA participant who elects high deductible health plan/HSA coverage for the following year may elect to carry over up to $500 of unused amounts remaining in the general purpose FSA at the end of the current year to a limited purpose FSA for the following year.
- Automatic carryover to limited purpose FSA. A general purpose FSA may be written to provide that unused amounts of up to $500 will automatically be carried over to a limited purpose FSA for any FSA participant who elects high deductible health plan/HSA coverage for the following year.
- Forfeiture option. A general purpose FSA may be written to allow a participant to elect, prior to the beginning of the following year, to decline or waive the carryover amount for which the participant would otherwise be eligible.
Any other carry over of general purpose FSA funds will disqualify an FSA participant from participating in an HSA in the following year, even after there are no funds remaining in the FSA.