Guidelines for compliant HSA FSA compatible programs
Access HSA FSA compatible guidance and compliance factors for employers–plus pro-tips for those with FSAs first launching an HSA.
How to launch a pre-tax program that's HSA FSA compatible
Many times employers who offer an HDHP with HSA have employees transitioning from a Healthcare FSA to an HSA. Ensuring an HSA and FSA remain compatible can be painful and problematic if you’re offering an HDHP with an HSA for the first time, there are considerations to review to ease administration efforts and avoid common pitfalls. Below are compliance considerations and best practices to help employers launch pre-tax accounts that successfully encompass both an HSA and FSA.
HSA FSA compatible compliance considerations
The IRS does not allow employees to have both a healthcare FSA and receive contributions towards an HSA. As a result, employees who have funds in their prior year’s healthcare FSA that can be accessed in the new plan year via a carryover provision or grace period cannot contribute or receive contributions in their HSA at the beginning of their plan year.
Why consider a Limited-Purpose FSA
The best practice when setting up an HSA for the first time is also to offer a Limited-Purpose FSA (LPFSA). An LPFSA is compatible with an HSA and balances do not place restrictions on contributions to an HSA. It’s important to note when offering an HSA with LPFSA, the funds in the LPFSA are limited and can only be used for eligible dental or vision-related expenses. Employees can then roll over available balances in the prior year’s healthcare FSA into the LPFSA.
For example, a company with a 1/1 plan year could take the following steps:
- If offering a $570 carryover: The remaining funds in a healthcare FSA can move to an LPFSA. The balance does not restrict the employee’s or employer’s ability to contribute to the HSA 1/1.
- If including a grace period: The remaining funds in the healthcare FSA can transition into an LPFSA. Employees can use the remaining balance until the grace period ends, usually on March 15.
What to do when not offering an LPFSA
Those not providing an LPFSA need to carefully track who is transitioning from a healthcare FSA to HSA. Additionally, employees are not eligible to benefit from carryover or grace period provisions. All funds must be used or lost based on the plan year.
For example, a company with a 1/1/22 - 12/31/22:
- must receive written confirmation from employees that opt into waiving their balances.
- have to communicate with vendors the names of employees that waived benefits manually.
When choosing against providing an LPFSA, you will need to:
- Communicate to employees that they will not benefit from carryover or grace period provisions.
- Have employees acknowledge that they are forfeiting the funds in FSAs at the end of the plan year if not spent down by enrolling in an HSA.
- Inform vendors which employees' balances should be forfeited at the end of the plan year and not roll over funds into the new plan year via the carryover or grace period provisions.
The bottom line, the steps combined can be tedious and time-consuming for employers–as well as painful for employees losing out on funds.
HSA FSA compatible best practices
It’s best to work with your vendor to understand the end-of-plan-year processes. Together, determine if there is an automatic transfer of funds or a need for manual intervention from HR administrators. Knowing how to handle historic and new pre-tax accounts and balances is particularly important for companies using different HSA and FSA vendors. In general, when using one provider for an HSA and another for FSA, the automatic transfer is not available.
When setting up an HSA, consider pairing it with an LPFSA. Doing so streamlines year-end administration. Furthermore, providing an LPFSA allows employees with unused balances to keep funds in a compatible account and use the money to pay for eligible dental and vision expenses.
Be sure to take the following steps:
- Review if your FSA is truly use it or lose it, has a grace period, or includes a carryover amount.
- Set up an LPFSA in conjunction with your HSA.
- Talk to your vendor to understand how unused balances transfer over from a healthcare FSA to an LPFSA. Ask if the transfer is automated or if manual intervention is required.
- If your HSA and FSA vendors are different, connect with both vendors to understand processing times and what actions are required for a streamlined transition.
Want more information? Choose from one, some, or all of the links to view more details on pre-tax benefit programs.
The pre-tax benefits guide for employer-sponsored HSA, FSA, and Commuter programs
A closer look at pre-tax benefits: HSA vs. FSA comparison
How to drive employee pre-tax education and engagement