Eligibility Rules for Enrolling in Both an FSA & an HSA

December 13, 2021

Eligibility rules for tax-advantaged healthcare savings accounts can be confusing for employees, especially if their employer offers a high-deductible health plan (HDHP) and multiple savings account options. Let’s look at an example of a common situation and eligibility rules to maintain compliance.

Example

John is enrolled in a healthcare flexible spending account (FSA) and wants to enroll in a health savings account (HSA) at open enrollment. Can he have both open accounts at the same time? What happens if John’s FSA has a rollover or grace period?

General Eligibility

FSA enrollment is irrevocable for the entire plan year without a qualifying event. Enrolling in an HSA is not considered a qualifying event. Therefore, John is not eligible to contribute to an HSA since he’s already enrolled in a healthcare FSA. Although he can enroll in an HDHP, he must be HSA-eligible to open an HSA. As John cannot drop his healthcare FSA midyear, enrollment in the HSA is not an option until his healthcare FSA plan year ends.

FSA with a Rollover

A rollover gives employees the ability to roll over up to $570 (new limit for 2022) of unused funds to the next plan year.

If John rolls over any unused healthcare FSA funds to the new plan year, he will not be eligible to enroll in or contribute to an HSA. In order to be HSA-eligible, he would need to spend all of his FSA funds by the end of the plan year or transfer his healthcare FSA funds to a limited purpose FSA. Converting funds from a healthcare FSA to a limited purpose FSA can only be done if there is a balance at the end of the current FSA plan year. John can decline participation in the rollover to begin contributing to the HSA at the start of the plan year.

FSA with a Grace Period

The grace period is usually two and a half months following the end of the plan year, during which time employees can incur eligible expenses and still use remaining funds in their account to cover those expenses.

If John’s healthcare FSA has a grace period and he has no funds remaining in the FSA at the end of the plan year, he can start contributing to the HSA at the beginning of the new plan year. However, if John has any funds remaining in his healthcare FSA at the end of the plan year, he must wait until the grace period ends to begin contributing to an HSA. He will be eligible to begin contributing to the HSA at the beginning of the following month. John can’t decline the grace period to start contributing to an HSA earlier.

Due to COVID-19-related legislation, some employers have extended their grace period beyond the standard timeframe. This would further delay an employee’s HSA eligibility. In this scenario, the earliest John would be eligible to contribute to an HSA is one month after the end of the grace period.

Education is Key

Employers offering multiple healthcare savings account options and an HDHP would be wise to provide employees with clear education regarding the eligibility rules for taking advantage of these helpful benefits.