Last year the IRS published Notice 2013-71 allowing the carryover of up to $500 in a flexible spending account (FSA) from one year to the next. However, this Notice created uncertainty about the effect of such a carryover on eligibility for health savings accounts (HSAs).
In response to this uncertainty, the IRS has released a Chief Counsel Memorandum addressing carryovers of unused health FSAs and eligibility for HSAs. The memorandum confirms that carryover to a general purpose health FSA will result in an individual being ineligible for contributions to an HSA. However, the Memorandum states that an individual may elect to have unused amounts from the general purpose health FSA carried over to an HSA-compatible health FSA. There is no requirement that the unused amounts in the general purpose health FSA only be carried over to a general purpose health FSA. Further, a cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may automatically treat an individual who elects coverage in a high deductible health plan (HDHP) for the following year as enrolled in the HSA-compatible health FSA and carry over any unused amounts from a general purpose health FSA to the HSA-compatible health FSA for the following year.
This Memorandum is very helpful for employers who sponsor HDHPs and wish to offer the $500 FSA carryover. We expect the Memorandum will result in a wider adoption of the FSA carryover.
For further information visit Waller's ERISA Exchange blog
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