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IRS Memorandum on Flexible Benefits Plan Carryover Option and HSA Eligibility

Although carryover of health flexible spending accounts (health FSAs) funds was introduced for 2013 calendar year plans, many questions remained concerning the classification of funds that are carried over from one plan year to the next. Should the carried over funds be classified as the previous year health FSA or could they be labeled as current year health FSA elections? After all, the health FSA coverage a participant obtains determines if that participant may set up and contribute to a Health Savings Account (HSA).

An IRS release on March 28, 2014 gives plan administrators an insight into how carryover funds may be designated in the current plan year and the affect on Health Saving Account (HSA) eligibility.

Background
Notice 2013-71 released October 31, 2013 modified the rules for IRC Section 125 cafeteria plans to provide a carryover of unused health FSA funds. Up to $500 may be carried over into the immediately following plan year for participants in health FSAs.

Our Compliance Update on November 1, 2013 with a follow-up on November 12, 2013, outlined the rules for the carryover provision. In addition, our Resource Center website at: https://www.wageworks.com/useitorloseit/ has amendment packages, employee communication materials and answers to frequently asked questions.

IRS Memorandum 201413005
Because Memorandums are written to address a specific set of circumstances and questions submitted to the IRS, a Memorandum may not be used or cited as precedent. However, it can be used as an insight to the IRS’s thoughts on a particular subject.

Written in a Q&A format, the Memorandum detailed scenarios for health FSAs and whether an HSA could be set up and contributed to in different circumstances.

An individual covered by a general purpose health FSA:

  • disqualifies that individual from making contributions to an HSA solely as a result of a carryover of unused amounts from a general purpose health FSA from the prior year.
  • disqualifies that individual from making contributions to an HSA during the entire year solely as the result of a carryover of unused amounts in a general purpose health FSA from the prior year. This is true even for months in the current plan year after the general purpose health FSA no longer has any amounts available to pay or reimburse medical expenses.
  • who elects, for the following year, to participate in an HSA-compatible health FSA may elect to have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA. There is no requirement that the unused amount be carried over to a general purpose heath FSA. However, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.
  • who elects unused funds be carried over from a general purpose health FSA to an HSA-compatible health FSA is eligible to contribute to an HSA during the following year if the individual is otherwise eligible to contribute to an HSA.

A cafeteria plan may:

  • offer both a general purpose health FSA and an HSA-compatible health FSA and 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. This allows participants to carry over any unused amounts from a general-purpose health FSA to the HSA compatible health FSA for the following year.
  • provide the individual participating in a general purposed health FSA the right to decline or waive the carryover for the following year. This individual may contribute to an HSA during the following year if the individual is otherwise eligible to contribute to an HSA.

Uniform cover rules apply
When individuals elect a general purpose health FSA in a prior year and move to an HSA-compatible health FSA in the subsequent year, any claims covered by the HSA-compatible health FSA must be timely paid up to the amount elected for the HSA-compatible health FSA. Any claims in excess of the elected amount may be reimbursed after the run-out period when the amount of any carryover is determined.

As an example: Joe had 2014 excess contributions from a general-purposed health FSA in the amount of $600 and a new 2015 election of $2,500 in a limited-purpose health FSA. Joe submits an eligible dental/vision expense in the amount of $2,700 at the beginning of 2015. $2,500 would be paid from the current year limited-purpose health FSA. In February Joe submits and is reimbursed from the general purpose health FSA $300 for eligible expenses incurred in 2014. At the end of the run out period $300 in general purpose health FSA funds is unused and carried over to the HSA- compatible health FSA. $200 is paid for the excess of the January claim over the amount elected and $100 remains in the HSA-compatible health FSA for vision and dental expenses incurred in 2015.

In addition, Joe is allowed to contribute to his HSA as of January 1, 2015.

Memorandum 201413005 confirms WageWorks' practices established at the onset of the carryover plan project in 2013.

If you would like to amend your plan or have questions, please contact your Relationship Manager.

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