Health savings account (HSA) eligibility is often misunderstood

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IRS Publication 969 outlines the rules for one to be eligible for an HSA. To be eligible one must:

  1. Be covered under a high deductible health plan (HDHP), on the first day of the month.
  2. Have no other health coverage except what is permitted under “Other health coverage” (also defined in the publication)
  3. Not be enrolled in Medicare.
  4. Not be claimed as a dependent on someone else’s tax return.

Of these four eligibility rules, there is often confusion around item #2. Many do not connect “other health coverage” with health FSAs/HRAs.

Employees enrolling in their employer’s general purpose (i.e. can be used for medical expenses) health FSA or HRA or an employee’s spouse being enrolled in their employer’s health FSA, generally disqualifies an employee from making or receiving HSA contributions for the entire plan year.

Likewise, if there are funds left in an employee’s health FSA at the end of the FSA plan year and there is a:

  • grace period (i.e. up to an additional 2 ½ month period after the FSA plan year ends when expenses may be incurred) an employee is not eligible to make or receive HSA contributions until the first of the month after the grace period is over.
  • carryover provision (i.e. permitting up to $500 of the unspent FSA balance to be used in the next plan year) an employee will be ineligible to make or receive HSA contributions for the entire plan year.

There are ways for a health FSA or HRA to be designed (e.g. post-deductible or limited-purpose) so it’s compatible with an HSA and there are also ways for employers to ensure employees don’t lose HSA eligibility for the following year (e.g. if FSA has a carryover provision and an employee elects an HDHP, the balance automatically transfers into a limited purpose FSA), so it’s important to work with your benefits consultant and FSA administrator to ensure employer-provided benefits don’t become “gotcha’s” for your employees.

FSA – Grace Period vs. Run Out Period

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FSA plan year = 12 month period expenses may be incurred

Grace period = up to an additional 2 ½ month period after the FSA plan year ends when expenses may be incurred, as determined by the plan administrator (i.e. employer)

Run-Out period = time frame after the plan year and/or grace period has ended to submit claims for expenses incurred during the plan year and/or grace period (depending on plan design & determined by plan administrator)

Some plans are set up to have two run-out periods, one that starts at the end of the FSA plan year and a 2nd one that starts at the end of the grace period.

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Not all TPAs systems will accommodate this, rather they only allow the run-out period to start at the end of the FSA plan year. Therefore, if you want employees to have time to submit claims after the grace period ends for expenses incurred during the grace period, you must ensure the run-out period time frame is longer than the grace period.

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