How To Help Employees Transition From a Medical FSA to an HSA
November 12, 2019
Do you have employees enrolling in a High-Deductible Health Plan (HDHP) for the first time? They’re not alone. HDHPs have become increasingly popular, with many Americans choosing to take advantage of these plans’ lower premiums and Health Savings Account (HSA) eligibility. If you have employees who are moving from a traditional health plan and General Purpose Medical Flexible Spending Account (Medical FSA) to an HDHP and HSA in the next plan year, here are some answers to a few common questions so you can help them enjoy a seamless transition.
Do participants have to spend all of their Medical FSA funds before contributing to an HSA?
Yes. Medical FSA participants are not eligible to participate in HSAs. For an employee to be eligible for an HSA, your Medical FSA’s plan year must have expired and their account must not have a balance.
What if our Medical FSA has a run-out or grace period?
A Medical FSA’s run-out period wouldn’t affect HSA eligibility, since run-out periods just give them more time to submit claims. Run-out periods don’t extend the amount of time claims can be incurred.
If your Medical FSA has a grace period, then your employees’ HSA eligibility would begin either:
- At the end of their plan year (if they spend all of their funds by then).
- When the grace period expires (if they carry funds past the end of the plan year and into the grace period). They would become HSA eligible on the first day of the month that immediately follows the grace period’s end date. A grace period’s length can be up two months and 15 days past the plan year’s end date.
For example, let’s say your current plan year ends December 31, 2019 and you have a grace period that runs until March 15, 2020. For your employees enrolled in a Medical FSA to be eligible for an HSA, they would need to either spend down their Medical FSA balance by December 31, 2019 (which would make them HSA eligible on January 1, 2020), or their HSA eligibility would begin on the first day of the following month after the grace period expires (April 1, 2020).
What if our Medical FSA has a carryover?
The IRS allows up to a $500 carryover for FSAs from one plan year to the next. If your employees’ Medical FSA has a carryover, you have a couple options to help your employees become HSA eligible:
- You can encourage them to spend down their balances by the end of the plan year. As long as your employees don’t have a balance, they’ll be eligible for an HSA in the following plan year.
- You can allow your employees to transition their $500 Medical FSA carryover funds to a Limited Purpose FSA or Combination Medical FSA. HSA participants are eligible to have either a Limited FSA or Combination FSA.
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