Long-awaited Internal Revenue Service guidance released Friday details how employees will be able to carry over up to $500 in unused contributions remaining in general-purpose flexible spending accounts to the next year and not lose their ability to contribute to health savings accounts.
Under long-standing IRS rules, contributions to HSAs are not allowed when employees are enrolled in general-purpose FSAs. Contributions to HSAs, however, are permitted for those employees enrolled in limited-purpose FSAs — arrangements in which account balances can be used to pay only for dental, vision and preventive care services.
What remained unclear until Friday's guidance was how, if at all, employees could contribute to HSAs in a year in which they carried over up to $500 in unused balances from prior-year contributions to their general-purpose FSAs.
The IRS guidance provides ways unused FSA contributions can be carried over without employees losing their ability to contribute the following year to HSAs.
Under the first way, an employee participating in a general-purpose FSA can elect to have unused balances carried over the next year to a limited-purpose FSA.
Under the second way, employers can design their general-purpose FSAs so that unused amounts are automatically carried over the following year into limited-purpose FSAs for those employees enrolled in health plans linked to HSAs.
Under another approach authorized by the IRS, employers can give employees — prior to the next plan year — the option to decline or waive a carryover from their general-purpose FSAs. In that situation, employees who declined to carry over the unused balances could contribute to an HSA the following year.
The breadth of these IRS options “is very good news and gives employers plenty of time to prepare,” said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.
The IRS gave the green light to rollovers in 2005 rules that said rollovers are permitted but must be used to pay expenses incurred during the first 2˝ months of the following plan year.
Then, last year, the IRS said employers could modify their FSAs to allow employees to carry over up to $500 in unused contributions remaining at the end of a plan year to be used in the next plan year.