Jump to content

Time-Sensitive Question re "Grace Period"


Recommended Posts

Client has had an FSA for a long time and has amended it to take advantage of the newly-available 2.5-month extension of coverage. Client is also adding an HDHP/HSA combo beginning 1/1/06. Client has been told that anyone who contributed to the FSA in 2005 will be ineligible to contribute to the FSA until 4/1/06 (first day of first month following expiriation of extended coverage period) because of "exclusivity" requirement attached to the HDHP/HSA combo. Client must answer the following questions in the next 2 hours (I know, I know):

1. I have some memory of the IRS issuing transition relief on this very issue, but can't find it and might be imagining it.

2. Assuming that those who contributed to the FSA in 2005 aren't eligible to contribute to the HSA until 4/1/06, can they "backload" their contributions for the remainder of 2006 and thereby still contribute the annual maximum? I assume they can't.

3. Same assumption as #2--what about expenses incurred between 1/1/06 and 3/31/06? Can HSA participants who were 2005 FSA contributors use $ in the HSA to to pay for expenses incurred before they started contrbuting? I'd be surprised if the answer is "yes."

Thanks for any help.

Link to comment
Share on other sites

It is correct that this is an issue. There is guidance about having FSA/HRA at the same time as HSA, but there is no guidance yet on the grace period issue. But, the grace period does make a person ineligible for an HSA. Therefore, they cannot contribute to the HSA until 4/1. They cannot "backload" the HSA for the 3 months they missed because they were ineligible to have an HSA at that time. So, they can only contribute 9/12 of the maximum allowable. Our customers have been handling this in one of two ways:

1) Anyone who enrolls in HSA cannot have the FSA. But that doesn't resolve the problem of employees who have FSA with a grace period in 2005 and then have HSA in 2006.

2) Anyone who enrolls in the HSA can have the FSA, but does not get the grace period. So, there are really two eligible groups: one with HSA and one without. We've run this through legal and found it ok.

Just remember, anyone with both an FSA and an HSA cannot receive reimbursement from the FSA for anything other than dental and vision expenses until the HDHP deductible has been met. So, the FSA had better be either a limited FSA (dental & vision) or a post-deductible FSA (only pays after ded is met).

The IRS is aware of the grace period vs. HSA issue and we are hoping for guidance, but we don't know when it will come.

Link to comment
Share on other sites

It is correct that this is an issue. There is guidance about having FSA/HRA at the same time as HSA, but there is no guidance yet on the grace period issue. But, the grace period does make a person ineligible for an HSA. Therefore, they cannot contribute to the HSA until 4/1. They cannot "backload" the HSA for the 3 months they missed because they were ineligible to have an HSA at that time. So, they can only contribute 9/12 of the maximum allowable. Our customers have been handling this in one of two ways:

1) Anyone who enrolls in HSA cannot have the FSA. But that doesn't resolve the problem of employees who have FSA with a grace period in 2005 and then have HSA in 2006.

2) Anyone who enrolls in the HSA can have the FSA, but does not get the grace period. So, there are really two eligible groups: one with HSA and one without. We've run this through legal and found it ok.

Just remember, anyone with both an FSA and an HSA cannot receive reimbursement from the FSA for anything other than dental and vision expenses until the HDHP deductible has been met. So, the FSA had better be either a limited FSA (dental & vision) or a post-deductible FSA (only pays after ded is met).

The IRS is aware of the grace period vs. HSA issue and we are hoping for guidance, but we don't know when it will come.

Thanks, Chloe. That's what I thought.

Link to comment
Share on other sites

  • 4 weeks later...
Guest greatlakeshsa

2. Assuming that those who contributed to the FSA in 2005 aren't eligible to contribute to the HSA until 4/1/06, can they "backload" their contributions for the remainder of 2006 and thereby still contribute the annual maximum? I assume they can't.

3. Same assumption as #2--what about expenses incurred between 1/1/06 and 3/31/06? Can HSA participants who were 2005 FSA contributors use $ in the HSA to to pay for expenses incurred before they started contrbuting? I'd be surprised if the answer is "yes."

Thanks for any help.

2 and 3. NO AND NO

Elgibility for a HSA is a monthly issue. If you weren't eligible for a HSA from Jan - to March, then you can't claim those expenses, nor can you contribution 100% of your annual deductible. Remember, you can have a HSA qualified plan and still have a FSA! Although you can't contribute to a HSA. Just because you have a HSA qualifed health plan, does not mean you can not use a FSA. At least a dozen of our clients were confused on this issue this past month. Many times, it makes great sense for people to enroll in a HD plan and keep the FSA! Especially if they have high out of pocket medical expenses

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...