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Employee opts out of medical coverage for 2017 but elects general purpose health FSA coverage during open enrollment because he is covered under spouse's plan.  Spouse terminates employment mid-year.  Due to the change in status, the employee enrolls himself and spouse under employer's HDHP starting June 1 and wants to contribute to HSA starting then.  Employee has exhausted health FSA balance.  Can employee terminate FSA effective May 31 and start contributing to an HSA thereafter?  I think not but cannot seem to find support either way.  Any help is appreciated,

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Chaz, 

This post is not to be construed as legal advice.

See IRS Publication 969:  https://www.irs.gov/pub/irs-pdf/p969.pdf which states:

Qualifying for an HSA
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
You have no other health coverage except what is permitted under Other health coverage, later.
You aren’t enrolled in Medicare. You can’t be claimed as a dependent on someone else's 2016 tax return.

 
My opinion (and it could be wrong) is that since the general purpose FSA has been exhausted and there are no more funds to be paid by the FSA. He & spouse are enrolling in the HDHP and they are no longer covered by her health plan or the FSA since funds are exhausted.  Reading the above it appears that they would be considered eligible individuals. If the general FSA had not been exhausted then they would not have been eligible until funds were exhausted from the GP/FSA. You might want to read further in the publication to see if they are limited on the amount of deduction if they are enrolling in the middle of the plan year or less than full plan year. Just my two cents. 
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This article might give you additional information:   https://thefinancebuff.com/hsa-and-fsa-same-year.html   which states:   If your health care FSA and HSA don’t overlap, you can contribute to both in the same year. For example if you have FSA with one job and you join another company that offers a high deductible plan with HSA, you can sign up for the HSA for the remaining months. If you are aggressive, you can invoke the “last month rule” and contribute the full year maximum to your HSA.

You may want to read "the last month rule" in the IRS publication I mentioned above.

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Chaz, your instincts are right. Informal remarks by Elizabeth Purcell, IRS, Office of Chief Counsel at the May 2005 ECFC Annual conference confirmed that an individual who is covered by a general purpose health FSA (or HRA) will be ineligible to establish an HSA for the entire period of FSA coverage, regardless of whether such individual has exhausted his or her health FSA (or HRA) account balance. So the question then becomes does the spouse's termination from employment constitute a valid change in status event that would allow him to cancel FSA coverage midyear thereby making him/her eligible to establish and contribute to an HSA? I think the answer is no. The cafeteria plan rules for revoking FSA election are slightly more restrictive for FSA than for other benefit options and would likely not allow the employee to revoke the elections in this situation because such an election change would be inconsistent with the change in status event. Good luck.

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  • 2 years later...

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