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, Health Flexible Spending Accounts (Health FSA), and Health Reimbursement Arrangements (HRA) that can be confusing and frustrating 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 HSA rules to be aware of, specifically related to Health FSAs. Though this transition can be done, it can get tricky especially if the plan years for your other benefits and your Health FSA don’t match. Before an employee can contribute to the new HSA, the employee must:
- reach the end of the plan year for the Health FSA, and
- fully exhaust the funds in the Health FSA if a Grace Period or Carry Over applies.
This timeline also includes employer contributions into HSAs, as you cannot contribute to an employee’s HSA if they have not met the criteria above. If your employer contributions are scheduled to be distributed before your Health FSA 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 Health FSA has a Grace Period, one way to avoid this is to schedule your employer contributions after the end of your Health FSA plan year and Grace Period, so the funds are automatically exhausted. 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, Grace Period ends in March), but it still allows them the chance to receive the contribution. Also, if your Health FSA has a Carry Over, you can avoid the issue by ensuring any Carry Over amount for a participant switching to a HDHP automatically goes into a Limited Purpose Health Flexible Spending Account (LPHFSA).
Limitations on HRA and Health FSA Participation
Under HSA rules, a family or individual cannot contribute to an HSA while covered by either a traditional, general purpose HRA or a Health FSA. This rule applies whether the individual is the participant in the Health FSA or HRA, or simply someone whose expenses can be reimbursed by a spouse’s HRA or Health FSA—both are considered “covered.” 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 Health FSA or HRA. To assist with medical savings in this situation, this couple could elect a LPHFSA or Limited Purpose Health Reimbursement Arrangement (LPHRA) to contribute pre-tax dollars available for expenses that don’t interfere with the HSA contribution restrictions.
For example, the American Fidelity LPHFSA only reimburses for qualified vision and dental expenses. For a Limited Purpose HRA, you, as the employer, can designate which expenses are qualified, 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 rule issues is to educate both employees and your HR department on these specific situations so issues can be caught early. During enrollments, ask the following questions to help raise red flags:
- Does an employee or his or her spouse have a general purpose Health FSA or Health Reimbursement Arrangement (HRA)? If so, they may not be eligible to contribute to the HSA until the plan year closes and the funds are exhausted (if a Grace Period or Carry Over applies).
- If an employee is signing up for a Health FSA, but the spouse is the primary insured at a different company, you should ask: Does the spouse have an HDHP with an HSA? If so, the employee is eligible for a Health FSA, but risks making the spouse ineligible to contribute to the 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, and provide a customized recommendation for each employee. 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.