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Plan design-either HSA or FSA, but not both?


Guest Carolyn Barnard

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Guest Carolyn Barnard

I can't find anything that says a plan administrator must coordinate participation in an HSA and a general- purpose health FSA. Is it permissable to design the plan to only allow participation in either-or for ease of administration?

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Guest chloe

A person who is enrolled in a general purpose FSA is not eligible to contribute to an HSA. So, they can't have both at the same time.

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Guest Carolyn Barnard

As usual, I'm not providing the full picture. I understand that they can't do both. Client is restating the plan and wants to know if they are required to amend to provide for a limited-purpose or post-deductible health FSA or if they can just leave it as is and provide language that that they can't participate in both. They just didn't want to prohibit something that should be allowed. I have since found guidance that says it's not required. Thank you.

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Guest CassieG
As usual, I'm not providing the full picture. I understand that they can't do both. Client is restating the plan and wants to know if they are required to amend to provide for a limited-purpose or post-deductible health FSA or if they can just leave it as is and provide language that that they can't participate in both. They just didn't want to prohibit something that should be allowed. I have since found guidance that says it's not required. Thank you.

Would you mind sharing the guidance advising that the plan can just be amended to state the participants cannot participate in both plans? We've had a similar situation come up just today, and I was not able to find anything specifying -- can the Plan Administrator have both a Limited and a Full FSA, if the HSA participants only participate in the LFSA?

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  • 1 month later...
Guest taxesquire

Jacmo's right - an employer can exclude members participating in the HDHP from being eligible for the FSA.

Would you mind sharing the guidance advising that the plan can just be amended to state the participants cannot participate in both plans? We've had a similar situation come up just today, and I was not able to find anything specifying -- can the Plan Administrator have both a Limited and a Full FSA, if the HSA participants only participate in the LFSA?

I don't have a specific citation on this - don't know if it's mentioned in the HSA Rev Procs, but employers have the ability to decide who is eligible for what plans. I guess there could be an issue if all HCEs elected the nonHDHP so they could participate in the FSA while nonHCEs elected the HDHP so they were excluded, but I can't imagine that being the case.

PS - is there an easy way to automatically spellcheck my posts?

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If the employer has been maintaining a general purpose FSA on the calendar year, and then adds a HDHP with HSA account as a medical plan choice as of July 1, can the FSA be amended mid-year to limit allowable reimbursements to limited purpose expenses only for those participants who elected the HDHP/HSA coverage?

Essentially, the employer wants to offer both a general purpose FSA and a limited purpose FSA. I would prefer if all of these changes were done as of January 1. But since it's mid-year, will the employer's unilateral change to the FSA plan affecting those participants who elect HDHP/HSA coverage be effective in protecting the tax deduction for HSA contributions? The FSA would also provide for rollover to the HSA and grace period, so that at December 31 the participant could choose to transfer the lesser of the remaining or Sept 2006 FSA balance to the HSA.

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Guest taxesquire

Yes, but then you have participants who selected an FSA conribution rate based on their ability to use it for copays. I don't think changing to an HDHP is a change that would allow an election change for the FSA.

Also, if the HDHP will only exist for the 2nd half of the plan year, will the full deductible still apply? Or is it that you're gonna have 1 medical plan (the nonHDHP) run on a calendare year and teh HDHP run on the fiscal year?

I don't recall exaclty, but I think the FSA-HSA rollover period has expired already.

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We weren't planning on having the participants make new FSA elections as of July 1; we just wanted to amend the FSA to restrict the allowable reimbursements for those covered by the HDHP. That would probably result in participants having funds left over at year end, which is why we were adding the rollover provision. My understanding is that a rollover can be done as late as 2012.

The HDHP, and the nonHDHP, run on a contract year ending June 30. The FSA runs on a calendar year.

My original question was trying to determine whether the change in the FSA mid-year would be an effective method for treating the HDHP-covered participants as eligible individuals entitled to HSA deductions for the second half of the year. Or, since the participants had made 12-month elections under the FSA back in January, are they stuck with no HSA deduction this year?

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Guest taxesquire
My original question was trying to determine whether the change in the FSA mid-year would be an effective method for treating the HDHP-covered participants as eligible individuals entitled to HSA deductions for the second half of the year.

yes, it would be effective

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Correct me if I'm wrong folks, but if I understand correctly, mid year rollovers are not permitted (at least, not without tax consequences). The following info is from IRS Notice 2007-22, under "Qualified HSA Distributions":

"A qualified HSA distribution may be made at any time prior to January 1, 2012. However, even if the qualified HSA distribution reduces the balance of an FSA or HRA to zero, the health FSA or HRA coverage does not end. If the FSA or HRA is not HSA-compatible, employees can become eligible individuals only after transfers at the end of the plan year. Consequently, qualified HSA distributions from health FSAs or HRAs that are not HSA-compatible and that take place at any time other than the end of a plan year, generally result in the inclusion of the distribution in income and the imposition of an additional 10 percent tax."

And further down-- "Unless a participant has a change in status as provided in Treas. Reb. 1.125-4(a), health FSA elections may not be changed during a plan year......."

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I agree with what you're quoting. But we're not talking about a mid-year rollover. The intent was to amend the FSA effective July 1 to only reimburse limited purpose expenses for anyone covered by the HSA. This presumably would make the FSA HSA-compatible. Then, at the end of the FSA's plan year (December 31) the participant could do a rollover to the HSA.

My concern was whether the employer's amendment of the FSA was sufficient to render the participant an eligible individual for HSA deduction purposes, even though the participant had made an election under the FSA at the beginning of the year when it was not HSA-compatible.

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If mid-year the ER offers a LFSA/HSA combo, could the EEs who already have for the year a GFSA choose to limit the unused balance of the GFSA for the rest of the year and then elect HSA contributions as well?

If it didn't involve a mid-year change in the amount of the FSA, then mid-year change in status should not be relevant. This would instead merely be the EE agreeing mid-year to a limitation on his or her use of the balance of the FSA benefits during the remainder of the year.

If it is by individual choice rather than imposed unilaterally by the ER then there shouldn't be a cutback on promised benefits.

However, if any of the GFSA benefits were used earlier in the year in a way that would apply them to the deductible of the HDHP necessary to be eligible for HSA contributions during the balance of the year, then that ought to be problematic--otherwise starting a year with GFSA and then adding the LFSA/HSA combo mid-year would permit an end run around the no-other-coverage requirement.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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cathyw--thanks, now I understand. However, I still don't think so. Those employees who are covered by the FSA are covered until the end of the plan year by that plan, even though you are amending the plan to include a new type of FSA (the limited purpose FSA).

J simmons makes an important point with his statement--"If it is by individual choice rather than........." but I see the outcome differently.

Usually, election changes are allowed due to circumstances beyond a participants control, or certain life events, or court ordered events, etc. I see the individual choice in this instance as being a non-qualifying event, and that you have a new plan in addition to the general purpose FSA. Changes in cost or coverage or not qualifying events for FSAs.

But that's just my take.

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Guest taxesquire

If the FSA is amended mid-year to be a limited purpose FSA (or a limited purpose FSA for any employees in an HDHP), those participants can properly contribute to an HSA.

If the FSA is not amended, but HDHP participants are told to self-limit their FSA submissions, that's not good enough.

If the FSA is not amended, I don't know whether participants who fully-exhaust their available balance become eligible to fund an HSA.

I had not thought about the cutback issue with amending an FSA midyear, but think the true question (I think this is what Jacmo was alluding to) is whether the amendment constitutes a change in coverage that would allow a change in elections. Now that I think about it, I'm surprised the IRS ahsn't addressed it. Maybe they have?

As an aside, the employer should take comfort int he fact that if there is a mess-up, it's not an FSA mess-up, it's an HSA mess-up and only the employee is responsible, although maybe there is a connection when the employer is knowingly doing payroll deduction into the HSA and FSA for the same participant...

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I too was not focusing on any cutback issues if the plan is amended to limit the allowable expenses. What concerns are there regarding cutback? I'm not aware of any anti-cutback rules re: FSAs similar to 411(d)(6) that applies to qualified retirement plans.

Getting back to the FSA question, if changes in election are not allowed in conjunction with the "cutback" amendment, and going forward the participant can only be covered for limited purpose expenses, have we then protected the HSA deduction? If the amendment constitutes a change in coverage that would otherwise allow a change in election, would that undermine the HSA deductibility?

The participants will be allowed to rollover at year end the lesser of their remaining balance or balance from September 2006. If there is no change in election, it is possible that participants will be leaving money behind if their Sept '06 balance was less than the 12/31/07 balance.

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If the amendment constitutes a change in coverage that would otherwise allow a change in election, would that undermine the HSA deductibility?

I think your intertwining two separate facets of the issue. The impact at the time of change is separate from how the plan interacts with the HSA rules after the change is made (that is to say, the HSA rules don't care how the FSA became compatible, rather the rules only care if it is compatible).

A mid-year amendment making a significant curtailment to the benefits of certain FSA participants is really too major to determine just from input from this board, you really should get a proper legal opinion from an ERISA / benefits law attorney.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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cathyw--see IRS Notice 2007-22, "Examples", "Permanent Rule Examples", Example 7.

The example does not fit your circumstances, BUT----there is a key statement that might apply to your situation. In the example an employee fails to be HSA eligible 7/1 because his participation in a calendar year health FSA is not disregarded coverage until 1/1/08.

I think that may apply in your situation. You are changing your 125 plan to include a new limited purpose FSA, in addition to the general purpose FSA which employees have already elected for. It would seem that their participation in the general purpose FSA would not be disregarded coverage until 1/1/08, for purposes of being HSA eligible.

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jacmo -

Thanks for the cite. The distinction between that example and what we were suggesting is that under the example, the participant was covered under the general fsa for the entire coverage period of the HSA. We were suggesting to amend the general purpose fsa into a limited purpose fsa (for those participants covered by an HDHP) so that the participant would not have general purpose coverage on and after July 1. There would be no new election by the participants...they would continue to contribute to the fsa based on their earlier election, but could only get reimbursement for limited purpose expenses. They would also be allowed to do a rollover to the HSA at 12/31/07. Of course, this could result in the participants forfeiting dollars under the fsa if their Sept. 2006 balance was smaller than their 12/31/07 balance (which is rolled over) and the remaining balance is not used up by the end of the grace period.

The issue that now has me uncertain is that this amendment would be a curtailment of the fsa benefits. I'm still looking into that aspect of this redesign.

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  • 3 weeks later...
Guest Jensen

This same issue has just come up for us -- a couple of e/ees are electing to switch from non-HDHP to HDHP/HSA during open enrollment (health plans are fiscal year-based) but both are already participants in the calendar year-based FSA.

If we amend the FSA to be a limited FSA/HSA-eligible, wouldn't that affect all of the other (non-HDHP/HSA) participants? But if we simply add a new limited FSA which would work with the HSA, aren't the newly-electing HSA e/ees still participants in the traditional/non-limited FSA until the end of the plan year (i.e. calendar year) or until a qualifying event would allow them to elect out?

In less confusing terms, I guess my question is whether it is possble to amend an FSA mid-year so that it provides two options for how the balance is spent, either limited (for HSA participants) or traditional (for all non-HSA participants) AND to allow participants to choose how their balance will be spent at anytime during the plan year?

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We resolved the issue with our client by amending the General Purpose FSA into a Limited Purpose FSA effective July 1, 2007 (the start date of the HDHP coverage) for all participants. It turned out that all participants chose the HDHP so the client avoided the problem of forcing non-HDHP participants into a Limited Purpose FSA. However, all participants were advised that they could only submit claims for limited purpose expenses through the end of the year (even though they could not change their FSA election amount) and therefore could wind up forfeiting some funds at the end of the grace period. But at least this way, they could set up HSAs and contribute for 2007.

I agree that you can't give the participants the option, mid-year, of choosing which FSA to participate in. If you don't amend the General Purpose FSA, then the HDHP participants cannot contribute to the HSA for the balance of the calendar year. You can implement a Limited Purpose FSA for 2008, and operate both FSA plans for next year, giving the participants the choice before January 1.

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Guest taxesquire

I haven't addressed the mid-year issue, but you can use a single health FSA document and provide under the def of "eligible expenses" 1 def for participants in the HDHP and a different def for others.

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  • 2 weeks later...
Guest Jensen
I haven't addressed the mid-year issue, but you can use a single health FSA document and provide under the def of "eligible expenses" 1 def for participants in the HDHP and a different def for others.

What we are going to (attempt!) to do is amend the plan to say something like "for all participants who have not also elected to participate in a HSA, reimbursements under this provision shall be for medical expenses as defined in Code Section 213" and "for all participants who are also participating in a HSA, reimbursemetns shall be limited to those allowed by Code section 223©."

The idea here is that the participant will always be eligible for the HSA, regardless of what his or her intention was at the beginning of the FSA plan year. Since our FSA plan year is a calendar year, and our health ins. plan year is a fiscal year (July 1-June 30), we always run the chance of having a participant who elects to change from regular health ins. to HDHP beginning July 1st, but is barred from a HSA for 6-9 months (until Dec. 31st or April 1st) because he or she elected an FSA at the beginning of the calendar year. By defnining the type of FSA (either limited or general purpose) based on whether or not the participant also participates in an HSA, it seems we could get around this problem. Therefore, if a participant who had regular, non-HDHP at the beginning of the FSA plan year switches mid-year to a HDHP and wants to participate in an HSA, his or her FSA is from that point on considered a limited FSA.

Sounds easy enough, but I still have some reservations about doing this. Particularly because it doesn't seem that much different from allowing the participant to revoke the general purpose FSA election, and elect a limited purpose FSA mid-year (which is obviously what we would do if that was allowed!)

Any thoughts? Pros and Cons?

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