Whether your organization is transitioning to a qualified High Deductible Health Plan (HDHP), or you offer both traditional medical plans and HDHPs, it’s important to understand the rules about Health Savings Accounts (HSA) and other medical reimbursement accounts.
Specifically, there are rules regarding HSAs, Healthcare Flexible Spending Accounts (HCFSAs), and Health Reimbursement Arrangements (HRAs) that can be confusing for both employers and employees.
Transitioning from Health FSA to HSA
When transitioning your employees from a traditional medical plan to a qualified HDHP paired with an HSA, there are some rules specifically related to HCFSAs. Though this transition can be done, it can get tricky—especially if the plan year for your other benefits doesn’t match your HCFSA.
Before an employee can contribute to the new HSA, the employee must:
- Reach the end of the plan year for the HCFSA, and
- Fully exhaust the funds in the HCFSA if a grace period or carryover applies.
This timeline also includes employer contributions into HSAs, as you cannot contribute to an employee’s HSA if they have not met the above criteria.
Grace Periods and Carryovers
If your employer contributions are scheduled to be contributed before your HCFSA plan year or grace period ends, there is potential for an employee to miss out on employer contributions for this first plan year. It’s important that your employees understand this when transitioning so they are not disappointed or reliant upon the employer contribution.
If your HCFSA has a grace period, one way to avoid this is to schedule your employer contributions after the end of your HCFSA plan year and grace period. Doing this could mean your employees will not get your contribution until three months after their HSA plan year starts (if plan year is January 1, and the grace period ends in March). But, it still allows them the chance to receive the contribution.
Also, if your HCFSA has a carryover, you can avoid the issue by ensuring any carryover amount for a participant switching to an HDHP automatically goes into a Limited Purpose Flexible Spending Account (LPFSA).
Limitations on HRA and HCFSA Participation
Under HSA rules, a family or individual cannot contribute to an HSA while covered by either a traditional, general purpose HRA or an HCFSA. This rule applies whether the individual is the participant in the HCFSA or HRA, or simply someone whose expenses can be reimbursed by a spouse’s HRA or HCFSA.
Because of this rule, an employee will not be eligible for HSA contributions if the employee’s qualified medical expenses can be paid or reimbursed under a spouse’s general-purpose HCFSA or HRA.
To assist with medical savings in this situation, this couple could elect an LPFSA to which they could contribute pre-tax dollars for expenses that don’t interfere with the HSA contribution restrictions. For example, the American Fidelity LPFSA only reimburses for eligible vision and dental expenses. You could also use a Limited Purpose HRA, and you can designate which expenses are eligible—as long as they do not interfere with HSA contribution restrictions.
Understanding the Rules
Most employers understandably struggle with these HSA rules, as it can be overwhelming to try and understand how someone may be out of compliance. The best way to prevent issues is to educate both employees and your HR department in these specific situations.
During enrollments, ask the following questions to help raise red flags:
- Does an employee, or his or her spouse, have a general purpose HCFSA or HRA? If so, they may not be eligible to contribute to the HSA until the plan year closes and the funds are exhausted (particularly if a grace period or carryover applies).
- If an employee is signing up for an HCFSA, but the spouse is the primary insured at a different company, ask: Does the spouse have an HDHP with an HSA? If so, the employee is eligible for an HCFSA but risks making the spouse ineligible to contribute to an HSA.
One of the ways American Fidelity can help you and your employees avoid these mistakes is to provide one-on-one benefit reviews during enrollment. During these reviews, our salaried account managers will study and learn all of your benefit offerings—including your medical, dental, and vision plans. This also provides an opportunity to ask eligibility questions, and potentially conduct a Dependent Verification Review.
HSAs can be confusing, but we’re here to help. Learn more, here:
To learn more about how American Fidelity can help, contact your local account manager.