Changing From Health Care FSA to HSA midyear

[Beth Martins]

Hello, 

For midyear changes - what constitutes an eligible QE for an employee to terminate an HCFSA midyear, and then start an HSA? As background: our FSA is a general-purpose FSA, not limited-purpose nor post-deductible. We recall one of Brian Gilmore's responses on this topic (1/5/2023 "Spouse added FSA, what do I do?" more information below). We want to confirm the following scenario would be in compliance: An employee waived health insurance but elected the Health Care FSA. Then, midyear, they lose their other health insurance (say through a spouse) and that is a QE to allow them to enroll in our health coverage midyear. The employee chooses the HDHP which has an HSA. Question: Does the QE that allows the employee to enroll in health insurance midyear, combined with their choice to elect the HDHP with HSA, also allow them to terminate the HCFSA in order for the HSA to be set up prospectively? We understand from the 1/2023 Q&A referenced above that someone can enroll in an HSA midyear if the HCFSA terminates due to an eligible QE.  If the scenario above is not eligible, can you please give an example of how an employee could make this switch midyear? 

As reference from the previously mentioned Q&A, Brian had noted the information below, and we are looking to the bold section:
"The spouse's general purpose health FSA is unfortunately disqualifying coverage for both the spouse and you. Spending the health FSA down to zero doesn't change that. The health FSA will remain disqualifying coverage for both you and the spouse for the full plan year. The only exception would be if the spouse revokes the health FSA (permitted election change event needed) or terminates (and doesn't elect COBRA for the health FSA)--in which case you could prospectively start HSA contributions on a prorated limit basis (HSA eligibility is determined as of the first day of each calendar month)." 

Thank you in advance for your insight! 

 

[Brian Gilmore]

Whether the employee can revoke the health FSA election depends on the type of permitted election change event that the employee experiences.  The change in status events set forth in §1.125-4 include the consistency requirement that all election changes must be on account of and correspond with the event that affects eligibility for coverage.  That will vary from event to event. 

• This isn't an exhaustive list, but it attempts to summarize those events and the election changes they permit: 2024 Newfront Section 125 Permitted Election Change Event Chart

Here's the cite:

Treas. Reg. §1.125-4(c)(3):

(3) Consistency rule.

(i) Application to accident or health coverage and group-term life insurance. An election change satisfies the requirements of this paragraph (c)(3) with respect to accident or health coverage or group-term life insurance only if the election change is on account of and corresponds with a change in status that affects eligibility for coverage under an employer's plan. A change in status that affects eligibility under an employer's plan includes a change in status that results in an increase or decrease in the number of an employee's family members or dependents who may benefit from coverage under the plan.

(ii) Application to other qualified benefits. An election change satisfies the requirements of this paragraph (c)(3) with respect to other qualified benefits if the election change is on account of and corresponds with a change in status that affects eligibility for coverage under an employer's plan. An election change also satisfies the requirements of this paragraph (c)(3) if the election change is on account of and corresponds with a change in status that effects expenses described in section 129 including employment-related expenses as defined in section 21(b)(2)) with respect to dependent care assistance, or expenses described in section 137 (including qualified adoption expenses as defined in section 137(d)) with respect to adoption assistance.

(iii) Application of consistency rule. If the change in status is the employee's divorce, annulment or legal separation from a spouse, the death of a spouse or dependent, or a dependent ceasing to satisfy the eligibility requirements for coverage, an employee's election under the cafeteria plan to cancel accident or health insurance coverage for any individual other than the spouse involved in the divorce, annulment or legal separation, the deceased spouse or dependent, or the dependent that ceased to satisfy the eligibility requirements for coverage, respectively, fails to correspond with that change in status. Thus, if a dependent dies or ceases to satisfy the eligibility requirements for coverage, the employee's election to cancel accident or health coverage for any other dependent, for the employee, or for the employee's spouse fails to correspond with that change in status. In addition, if an employee, spouse, or dependent gains eligibility for coverage under a family member plan (as defined in paragraph (i)(5) of this section) as a result of a change in marital status under paragraph (c)(2)(i) of this section or a change in employment status under paragraph (c)(2)(iii) of this section, an employee's election under the cafeteria plan to cease or decrease coverage for that individual under the cafeteria plan corresponds with that change in status only if coverage for that individual becomes applicable or is increased under the family member plan. With respect to group-term life insurance and disability coverage (as defined in paragraph (i)(4) of this section), an election under a cafeteria plan to increase coverage (or an election to decrease coverage) in response to a change in status described in paragraph (c)(2) of this section is deemed to correspond with that change in status as required by paragraph (c)(3)(i) of this section.

 

 

[Beth Martins]

Thank you so much, Brian. Based on your response and the chart, it looks like if an employee is enrolling in health coverage due to a QE (regardless of which plan they choose, even an HDHP with HSA) they can only enroll or increase their health FSA. Based on this, it appears we would have to keep that Health FSA active through the balance of the plan year, and then start the HSA with the new year. If I have missed or misspoken, please let me know, and thanks again! 

[Brian Gilmore]

The consistency rule is difficult to apply in some cases because it is often open to interpretation/judgment where there isn't an example in the regs directly on point.  In this case my understanding is the employee and spouse have lost medical coverage through the spouse's employer, and they are going to use that event enroll in the HDHP through the employee's coverage.  My reading of the consistency rule there is it likely would not permit the employee to drop the health FSA.  As you noted, this means that the employee would not be HSA-eligible.  

However, I would be open to an argument that because the §1.125-4 rules predate HSAs, there should be wiggle room to treat revocation of the health FSA election as consistent with enrollment in the HDHP.  It's a tough call.