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Conversion of Limited Purpose FSA Carryover Amounts to General Purpose FSA


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An IRS Chief Counsel Advice memorandum (2014-13005) provides that a cafeteria plan can permit employees who have leftover general purpose FSA amounts to elect to roll up to $500 over into a limited purpose FSA for the next plan year and therefore be able to contribute to an HSA for that plan year.

Can the opposite be done?: An employee participates in an HDHP/HSA and limited purpose FSA in 2015. The employee elects not to participate in the HDHP for 2016 and wants to rollover $500 from the limited purpose FSA into a general purpose FSA for 2016. Can a cafeteria plan so permit?


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I think probably, yes. However, I have not seen specific guidance for or against allowing this. Nor have I had an employer/plan allow this. However, if I play this scenario out in my mind it seems illogical for an employee to enroll in a full health FSA and then roll $500 from limited purpose FSA in a prior plan year into a limited purpose FSA in a new plan year and have both a new full health FSA account and limited purpose FSA account in the same plan year. It also seems like a messy situation from an administration perspective that could lead to mistakes and confusion. Though the fact that it's illogical and messy does not make it allowable by the IRS, but it does present a good business reason to allow it from a participant and plan administration perspective. In the absence of guidance from the IRS and the fact that we do have guidance that the opposite is allowable I suspect it's okay, but admittedly would want to dig further.  If  HSA enrollment in a new plan year is cause to allow rolling a full healthcare FSA balance from a prior plan year into a limited purpose FSA in the new plan year, I think losing HSA eligibility in the new plan year should allow rolling the limited purpose FSA balance from a prior year into a full Health FSA in the new plan year. Also, I've always advised that plans should not allow participants to enroll in both a full health and limited purpose FSA within the same plan year and this scenario effectively allows it. 

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