Implementing HSAs when the FSA has a Grace Period

10/19/2006

Even employees with a zero balance in their FSA cannot make contributions to the HSA until after the grace period extension.

Employers wishing to implement an HSA plan face hurdles when there is a grace period extension in place. Communication about how the plan works becomes more difficult. Since neither the employee nor employer can make contributions to the HSA during the extension period limiting their annual contribution to 75% of that allowed, it makes it tougher to encourage employees to participate in the HSA.

Remedies to the problem include amending the plan to eliminate the grace period. This may cause problems with employees who made their election knowing they could access funds during the grace period. Another remedy is to adopt a limited FSA during the grace period. Limited FSAs may be used alongside the HSA and are limited to dental, vision and preventive care expenses only. Again, this may cause problems for employees who set money aside for a medical expense that does not fit these categories.

Experts are recommending that employers who want to implement an HSA look at limiting the FSA during the grace period in 2007 and amend the plan to eliminate the grace period for 2008 and beyond.

Federal legislators are aware of these problems. The House Ways and Means Committee passed legislation that would allow the maximum contribution to employees' HSAs if there is a zero balance in their FSAs at the end of the year before the grace period begin or if they transferred the balance to the HSA. No one knows, however, if legislators will take up that bill during the brief special session after Congress returns following the November elections.

Source: "IRS rules create problems for firms launching HSAs," Jerry Geisel, Business Insurance October 16, 2006.

Categories: General, HSA, FSA, Consultants