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Tuesday, 12 March 2019 15:52

Top Tips When Mixing FSAs and HSAs

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As most employers know, employees who have a traditional copay-style plan can be eligible for a Flexible Spending Account (FSA) plan to cover medical expenses pre-tax. But, If the employer instead offers a High-Deductible Health Plan or HDHP, employees can contribute into a Health Savings Account (HSA) on a pre-tax basis.

But what happens when the employer offers both a copay-style plan and an HDHP?

Since Health FSAs follow many of the same IRS regulations as medical plans, there are specific rules and limitations employers should be aware of and communicate to employees. Here are some guidelines:

  • Generally, an employee cannot participate in both the FSA and HSA in the same calendar year

    • An exception is if they are participating in the HSA for medical expenses and a “limited-purpose” FSA for dental and vision expenses only.

  • Consider the open enrollment dates, particularly if the employer is not on a 1/1 renewal date yet runs the FSA on a calendar year basis

    • This can create a tricky situation if the employee decides to make a different plan election at open enrollment.

    • For example, the open enrollment date is July 1 and an employee decides to switch from the copay-style plan to the HDHP for 7/1/19. If the employee had signed up for the FSA plan for the 2019 calendar year, they would be prohibited from opening and contributing to an HSA (including receiving the employer contribution) until 2020. They would still be able to use any FSA money they had left over, even when they move to the HDHP plan in July.

    • Employers are required to make comparable contributions to everyone, so the above situation can be troublesome for their compliance as well. There are ways to work through this complication, however.

    • It does not matter if the participant has spent their FSA money or not. Once you contribute money into the FSA, you are prohibited from contributing to an HSA as long as that FSA plan year runs.

  • If they wish, employers can administer their FSA on a plan-year basis (consistent with their renewal date), as this greatly eases the burden of administering a dual option with both an FSA and an HSA. However, the one-time transition to get to a plan year basis requires careful planning and communication in advance. And, depending on the situation, there may be advantages or drawbacks, so it’s important to consult with an expert here.

  • If the employer allows for the $500 rollover amount into the next year and the employee is changing from the copay-style plan to the HDHP, their FSA rollover amount can typically be moved to the limited-purpose FSA if the employer has chosen to offer it.

As employers work with their FSA and HSA carriers on setting up their plans, they should ensure that these items are written clearly into the FSA Plan Document and Summary Plan Description. Although we’ve outlined the more common scenarios in this article, there are other rules that might apply in certain cases. We are happy to give you general guidance from a benefits perspective, and encourage you to involve your legal counsel as well if you are considering adding or deleting a dual option with FSA and HSA, especially if you have a non-calendar year plan.

If you would like to have your tax-free vehicle rules reviewed, please contact your Fall River Client Manager.

Read 1556 times Last modified on Monday, 14 September 2020 11:09
Tonya Young

Tonya is our Senior Account Manager and brings eleven years of prior insurance company expertise to Fall River, having worked at Anthem Blue Cross and Great-West Healthcare (now part of CIGNA). Tonya holds a Bachelor of Science in Psychology from Texas A&M University. Originally from Minnesota, she loves the Colorado outdoors and enjoys family time with her young daughter.

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