Can an FSA carry-forward and HSA walk hand in hand?
In a recently issued IRS technical advice memorandum (“TAM”) (IRS Chief Counsel Memo No. 201413005), this question was pondered. It should be noted that, generally, technical advice memoranda issued by the IRS Chief Counsel are in response to questions raised internally by IRS staff and do not carry the force of law i.e., cannot be relied upon; but they do give at least some indication of how the IRS is looking at things.
As background, last October, the IRS issued guidance (IRS Notice 2013-71) describing how a limited carry-forward of an unused FSA balance could be allowed (see IRS Guidance Modifies the Use-it or Lose-it Rule and Permits a Status Change Event for Marketplace Enrollment, Benefit Beat, 11/5/13). This modification raised concern about the impact of this carry-forward on a taxpayer’s ability to contribute to an HSA in the year of the carry-forward. The TAM affirms that a carry-forward from a general purpose FSA plan causes an individual to be HSA-ineligible. The individual remains HSA-ineligible for the entire plan year, even if the carry-forward is spent down, i.e., used up. The TAM affirms that the carry forward can, if the plan so provides, be placed into an HSA-compatible FSA, i.e., an FSA that only reimburses expenses after the minimum HSA statutory deductible has been satisfied, or reimburses permitted expenses such as dental or vision expenses.
The TAM further states that the plan can automatically place the carry forward into an FSA-compatible plan for all participants covered by high deductible health plan coverage.
Further, the TAM provides that before the beginning of the plan year, a participant can be allowed to waive (forfeit) any carry-forward in order to preserve HSA eligibility.
Finally, the TAM provides some rather convoluted rules regarding how to order pay-out during a run-out period. Unused amounts from a general purpose FSA during a run-out period can be used to reimburse any qualified medical expenses incurred prior to the end of the FSA plan year. Claims covered by the HSA-compatible plan must be reimbursed up to the amount elected for the plan year. Expenses in excess of the elected amount can be reimbursed following the run-out period when the carry-over amount is determined.
Correcting FSA Failures
The IRS also issued a TAM (IRS Chief Counsel Memo No. 201413006) relating to how to correct FSA failures. In a nutshell, if a plan needs to re-coup an improper FSA reimbursement, according to this TAM, it should generally follow the corrective methodologies applicable to debit card failures.