IRS – New Guidance Pertaining to FSAs & HRAs

On Friday, March 28, 2014, the IRS issued guidance regarding the FSA $500 Carryover and Health Savings Account (HSA) eligibility, in addition to guidance regarding FSA substantiation/correction of health care expenses. IRS Chief Counsel Memo No. 201413005 addresses Flexible Spending Account (FSA) carryovers and Health Savings Account (HSA) eligibility. IRS Chief Counsel Memo No. 201413006 addresses correction procedures for improper FSA payments. Regarding FSA carryovers, the IRS provided the following clarifications: 1. An individual in a medical FSA is not eligible for an HSA, even if the balance consists solely of carryover or grace period amount. 2. In regards to the carryover, this HSA ineligibility will continue for the entire plan year, even if the balance is exhausted earlier in the plan year. 3. In regards to the grace period, this HSA ineligibility will continue for the length of the grace period, even if the balance is exhausted before the end of the grace period. 4. As an alternative, a medical FSA can be designed to allow an individual to elect that the carryover amount be used as Limited FSA, so that the medical FSA is compatible with the HSA. The carryover amount cannot be transferred into any other non-Health FSA or another cafeteria plan benefit. 5. The medical FSA cannot be designed to allow an individual to elect to use the grace period and have it transfer into a Limited FSA unless the Limited FSA is established for all individuals. 6. A cafeteria plan may design the medical FSA so that any election for high-deductible health plan (HDHP) coverage, which makes an individual HSA eligible, can automatically force...