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What to do now? FSA / HSA Challenge


Guest ldlambert
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Guest ldlambert

Hi there -

We have a general purpose FSA. We initiated an HSA in 2005. At the time we did not know there may be a conflict between FSA & HSA. We found out about the conflict in December and our FSA provider told us that they did not offer a limited purpose FSA but that we could just advise participants on the fact that they needed to self regulate their FSA's as LFSA's.

We have two folks who want to enroll in HSA's effective 6/1/07. They are terming employment and therefore for their general FSA's on 6/29/07. Can they have an HSA for June?

We did advise all FSA & HSA participants about the restrictions on usage in December, and have provided periodic updates re: same. However, we did not cancel anyone's participation in the FSA. Should we?

All thoughts appreciated.

Leslie

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Self-regulate FSAs? Yes, if that means the employee that wants HSA contributions chooses not to elect for a year the general FSA; no, if that means the employee has a general FSA--but just doesn't seek reimbursement--for the year that the employee wants to be eligible for HSA contributions. It's the general FSA coverage, not whether the employee does or does not seek reimbursement, that is problematic for HSA contribution eligibility.

I don't think that you may cancel their FSAs. They elected them. That elected coverage rendered them ineligible for HSA contributions.

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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Guest ldlambert

Is it possible for us (the company) to write our own SPD for the FSA to make it a limited FSA or is that something only the FSA administrator can do?

By the way, this FSA administrator also offers HSA's and they still don't have LFSA's. And they're quite large! I don't understand why they don't do LFSA's.

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The company that is the employer sponsoring the plan for its employees can write its own SPD. If the same document doesn't do double duty also as the plan's governing document, then you'll only want to change the SPD after you made the same change to the governing document.

You might have a problem, though, with administration. Your FSA administrator might not be geared up to administer limited FSAs. That may be why it doesn't offer them.

It's definitely an unusual circumstance as of 6/07 for a 'relatively large' FSA administrator not to provide, or be able to provide, limited FSAs.

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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I would like to suggest that you find another provider that does offer LFSA's. I applaud you for trying to make it right, and it sounds like you care. But you can get into problems quickly if you try to do this yourself without any knowledge or expertise.

Also, if you have a broker/consultant who placed this business, I would call them in and find out why they put you into such a situation. The issue of a HSA and LFSA has been known for quite time and should have been known.

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Guest ldlambert

When we started learning about the HSA/FSA conflict in December, we started conversations with our broker. We ended up terminating the relationship due to their lack of knowledge in this area. Our new broker signed on with us in April. They have much more knowledge here, and I have a call with them today to sort through this.

Since it's mid plan year, I'm really trying to find a solution that won't be totally disruptive to the participants.

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You're in a rough situation. Somehow, you've got to end their participation in one or the other. It will not be very likely that you could "recall" all HSA contributions. Employer has no control over those accounts. What you can do:

Do a plan of correction on the 125 plan. As part of the corrective action, 1) terminate participation in the FSA 2) make whole anyone who is in a negative position (more deposits than receipts) 3) payroll deduct from those who are in a positive position (more claims than deposits). 4) All pre-taxed amounts are to be added back to those participant's w-2s.

I wouldn't envy the job of communicating this to the employees.

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Guest taxesquire

You've gotten good advice on this board, so I won't bother to repeat it, but just want to comment that for the new employees who have an FSA with their prior employer, if they do not elect COBRA coverage for the FSA or the prior employer's nonHDHP, then they should be eligible for your HSA.

Also, the corrective actions noted in the prior post would make me nervous (no offense meant - that poster may know more than me, but I just want to share my 2 cents). You may be able to completely terminate your 125 plan, but I'm not sure that you can make employees whole if they've been underreimbursed to this point. Also, is taht something you want to do?

I would probably write a letter to each HDHP participant apologizing for the confusion, and indication that the HSA contributions made while a participant in the FSA were improper. As the employer, I would then cease making payroll deductions into the HSA for those employees and would subject future earnings to increased income and employment taxes to make up for it (assuming this all occurred within the current year).

Then I'd look for some sort of compensation from the FSA administrator.

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  • 4 weeks later...
Guest MandyH

I am in the same boat. This year we are offering a HDHP in which employees who currently have a FSA account are wanting to cancel the FSA and move to an HSA. We will not be administering the HSA accounts this year as we are just not prepared to do so, with that being said can the employee "terminate" the FSA account for the remainder of 2007 or can we do a LFSA for the remainder of 2007 on these employees that choose the HDHP and go outside and open an HSA account?

Thanks!

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Guest taxesquire

The employees definitely cannot cancel their FSAs - that would be a clear 125 violation. As for converting the FSA to a limited FSA, I would think that would be OK, but you should check IRS guidance to be sure. I think some earlier posts here had peopel mentioning their reservations about that approach.

As an aside, you probably know this already, but any employees in the HDHP and who did not elect to participate in the FSA and are otherwise eligible to fund an HSA can establish an HSA on their own - they'll just need to contribute outside of payroll for now.

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Guest MandyH

So the employees that choose to participate in the FSA for 2007 but are now signing up for the HDHP can contribute to the HSA just outside of payroll? Once January comes around they can start contributing towards the HSA account through payroll as long as they have not signed up for the FSA for 2008?

Thanks so much for your reply.

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Guest taxesquire
So the employees that choose to participate in the FSA for 2007 but are now signing up for the HDHP can contribute to the HSA just outside of payroll? Once January comes around they can start contributing towards the HSA account through payroll as long as they have not signed up for the FSA for 2008?

Thanks so much for your reply.

No - if they chose NOT TO PARTICIPATE in the FSA they can contribute outside of payroll. I made an assumption that this would be important because you aren't set up to handle payroll contributions to HSAs.

If they elected into the FSA, then they're in. Now if they go out on their own, make improper representations and establish an HSA, they can improperly fund it outside of payroll and you'd never know. Fortunately, the liability would be all theirs, too.

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Guest MandyH

Thank you so much..

Do you perhaps know of any vendors that administer H.S.A. acocunts and F.S.A. accounts? Currently we use a third party administrator that handles F.S.A. only and we would like to find a vendor that can handle both..

Again thanks for replying.

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Guest taxesquire

HSAs are "self-administerred," meaning the participant "submits" the receipt to himself and pays himself out. The only thing for a TPA to do is handle the payroll deduction, if you allow HSAs to be funded this way.

FWIW, you do want coordination if there's an FSA and HRA. I know that CIGNA & United Healthcare can coordinate those. I expect a lot of others can, too.

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I respectfully disagree with part of the last reply. Any "co-ordination" is done by the employer. That is, make sure that employees are not participating in both accounts. I don't know how an insurance carrier would "co-ordinate" those 2 accounts. It's done at the employer level.

What do you want the TPA to do? There are 2 levels of service from TPAs: Recordkeepers (the highest level), and "facilitators" (for lack of a better word?), that provide startup help, and perhaps ongoing technical and legal assistance, employee info source, etc.

Ultimately, TPAs are not really needed after the initial startup of an HSA. The custodian should be able to provide full service for the HSA.

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Guest taxesquire
Any "co-ordination" is done by the employer. That is, make sure that employees are not participating in both accounts.

Only to the extent that an employer can't allow payroll deduction into the HSA for ineligible e/es. The e/r has no obligation to check that the employees are not setting up HSAs outside of the e/r's program and contributing outside of payroll.

I think a more likely scenario to occur, however, is like this:

husband participates in employer X's HDHP and HSA; spouse participates in Y's FSA. X should have husband certify that he's not eligible for an improper FSA, but it's not X's responsibility to look deeply into this.

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