New Guidance on FSA Carryovers and HSA Participants

April 16, 2014

The IRS recently published memorandum 201413005 providing guidance on HSA eligibility when an employer’s cafeteria plan adopts the new FSA carryover provision.

In October 2013, IRS Notice 2013-71 announced that cafeteria plans may adopt a provision to allow participants to carry over up to $500 of unused FSA funds to the next plan year. (Refer to Keller’s November 2013 Bulletin for more information.) Since participants in a general purpose FSA are not eligible to contribute to an HSA, this raised an important question for employees who elect to participate in HSA plans in the following plan year, but have prior year FSA balances carried over.

The IRS memorandum explains that an employer can amend their cafeteria plan documents to allow employees to carryover funds to a limited purpose FSA that is HSA-compatible, if available, or to decline the carryover of FSA funds. For more information on the carryover provision or revising your plan to include the HSA-compatible carryover or waiver, please contact your Keller account team.