Compliance Questions -HSAs and Health FSAs - Eligibility Issues
August 23, 2012
One of my employees just enrolled in a High Deductible
Health Plan ("HDHP") and is now eligible to contribute to a Health
Savings Account ("HSA"). A few
months ago, his spouse enrolled in a general- purpose Health Flexible Spending
Account ("Health FSA"). She
enrolled the whole family, including her spouse. If the spouse never submits
claims for her husband, is he still eligible to contribute to an HSA?
No.
Individuals who are covered by traditional, general-purpose
Health FSA are not eligible for HSA contributions. This rule applies whether
the individual is the participant in the Health FSA or simply someone whose
expenses can be reimbursed-both are considered "covered." Thus, an
employee's spouse will not be eligible for HSA contributions if the spouse's
qualified medical expenses can be paid or reimbursed under the general purpose
Health FSA in which the employee participates, as provided in Revenue Ruling
2004-45 and IRS Notice 2005-86. Nothing in the guidance limits this principle
to spouses, so adult children and other individuals (e.g., domestic partners)
who have HDHP coverage-and thus might otherwise be able to make contributions
to their own HSAs-will not be eligible to make HSA contributions if they are
also covered by a family member's general-purpose Health FSA.
A family member's eligibility may be preserved if the Health
FSA excludes him or her from coverage. But at the present time, it is unusual
for a Health FSA to restrict coverage, for example, solely to the covered
employee or solely to the covered employee and children (but not the spouse).
Most of these arrangements allow benefits for any eligible tax dependent. Plan
documents and administrative procedures would need to be redesigned in order to
facilitate such an "employee-only" or "employee-plus-children
(but not spouse)" coverage option. It is not sufficient for an individual
to simply promise not to request reimbursement (even if the promise is kept and
no claims are ever submitted).
In general, an individual who is covered by a general-purpose
Health FSA will be ineligible for HSA contributions for the individual's entire
period of coverage under the Health FSA -even after the individual has
completely exhausted his or her Health FSA.
Although an individual generally will not be eligible to
contribute to an HSA for the entire period of coverage under a general-purpose
Health FSA even if the Health FSA account balance has been exhausted, an
individual with a $0 balance at plan year-end under a general-purpose Health
FSA with a grace period can disregard that Health FSA coverage and be
HSA-eligible during the grace period, as provided in IRS Notice 2007-22. This
rule requires that the $0 balance be determined on a cash basis and taking into
account the uniform coverage rule. Cash basis means the balance as of the
relevant date, without taking into account expenses that have not been
reimbursed as of that date. Thus, pending claims, claims submitted, claims
received, or claims under review that have not been paid as of a date are not taken
into account.
Written by:
Larry Grudzien
Attorney-At-Law
Larry Grudzien, Attorney at Law | 708 South Kenilworth Ave.
| Oak Park | IL | 60304
