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Prior FSA, converting to HSA


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I am not very familiar with cafeteria plans or HSA plans. Client asks:

"We are converting our employee health plan to an HSA plan effective 1-1-10. Please let me know the impact of this on our FSA account for medical expenses. Can we have both an HSA and a Section 125 Plan? Does it make sense to have both?"

Can they amend existing FSA to allow employees to have their health insurance premiums withheld on a pre-tax basis (POP)? Or can they amend to a limited-purpose or post-deductible health FSA?

My understanding is that a person cannot participate in both a general purpose FSA and an HSA, correct?


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While it is true that you under most, if not all circumstances, you cannot pparticipate in both a general purpose FSA and an HSA, that does not seem to be the main issue here. However, to get to the main issue, I think thatt there is quite some confusion in the terminology being used.

Yes you can have both an HSA and a section 125 plan. However, the connection being made is questionable. The purpose of section 125 is to allow the pre-taxing of the cost of eligible coverage including for an HSA. See IRS Pub. 969 for an explanation of the connection between the 2 plans. You need the section 125 plan for the POP.

You cannot convert an "employee health plan" to an HSA. You can convert the medical coverage provided under an employee heallth plan to HDHP/HSA coverage. An HSA is not medical insurance coverage, per se, it is a means of covering supplemental eligible expenses incurred for medical care.

You do not pay health insurance premiums through an FSA.

A POP is not an FSA and is unrelated. So you do not amend a POP to change health insurance premiums salary reductions. You amend the Salary Reduction Agreement which is under your section 125 cafeteria plan..

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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