Switching from a Health FSA to an HSA

If you currently have a general purpose Health FSA, but you want to choose an HSA-eligible plan this year, make sure you don’t get tripped up by a Health FSA grace period or carryover.

The easiest path? Spend your entire Health FSA funds before the end of the Health FSA plan year.

Grace Periods and Carryovers

FSAs operate under a "use it or lose it" rule, meaning if you don’t use the money in your FSA by the end of the plan year, the money will be forfeited. However, the IRS allows employers to choose one of two options (or neither): 

  1. Provide a 2.5 month grace period (to spend down funds), or
  2. Rollover up to $500 of unused funds.

While, in general, grace periods and carryovers are a good thing, you need to be mindful of them when you move to an HSA.

If Your Health FSA has a Grace Period

  • You must spend your entire Health FSA funds so you have a zero balance before the end of the twelve-month plan year (before the grace period starts).
  • As long as you do this, you become HSA-eligible immediately at the end of the twelve-month Health FSA year (assuming that you are otherwise HSA-eligible).

But...

  • If you carry any balance into the grace period (even a single penny), you cannot become HSA-eligible until the 1st day of the month after the grace period ends.
  • This means you won’t be able to contribute to or reimburse yourself from your HSA until three full months into your new plan year.
    • The grace period is 2.5 months (beyond the twelve-month Health FSA plan year), and
    • HSA eligibility is determined on the 1st of every month, so
    • It’s three full months after the Health FSA plan year ends before you become HSA-eligible.

If Your Health FSA has a Carryover

  • Make sure to spend your entire Health FSA balance before the end of the twelve-month plan year.
  • As long as you do this, you become HSA-eligible immediately at the end of the twelve-month Health FSA year (assuming that you are otherwise HSA-eligible).

Employer Options

Employers have some options for employees making the move off a Health FSA to an HSA. So ask your employer if one of these applies:

  • Before the end of the plan year, employers may allow employees to transfer funds into a Limited-Purpose FSA. 
  • For all employees who select an HSA-qualified plan for the upcoming plan year, employers are also allowed to automatically move employees’ unused Health FSA dollars into a Limited-Purpose FSA.
  • Employers can also give an employee the option to waive participation in the Health FSA balance rollover to maintain HSA eligibility.

Resources and related articles:

HSA, FSA, HRA Comparison Table
HSA and FSA in the Same Year
IRS Memorandum No. 201413005 (3/28/2014)
IRS Notice 2005-86

Last updated 07/05/18

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