As we discussed in our previous blog post, Temporary Relief Allows Flexible Spending Arrangements to be More Flexible, Section 214 of the Consolidated Appropriations Act, 2021, Pub. L. 116-260 (the “Act”), allows employers to offer an extended use-it-or-lose-it and/or extended spend-down periods during which participants in a health flexible spending arrangement (“ health FSA”) may have access to unused health FSA amounts until the end of the subsequent plan year and/or after they terminate participation in the health FSA mid-year, respectively. In certain cases, access to unused health FSA amounts can make an individual ineligible to contribute to a health savings account (an “HSA”).

In general, an individual is eligible to contribute to an HSA, if the individual:

  • is covered under a high-deductible health plan (“HDHP”); and
  • is not covered by another health plan which is not a HDHP and which provides coverage for benefits covered under the HDHP (“disqualifying coverage”).

A general purpose health FSA is considered disqualifying coverage, because it covers health benefits before the individual has met his or her deductible under the HDHP. By contrast, an HSA-compatible health FSA is not disqualifying coverage because it either reimburses only excepted benefits, such as dental or vision expenses, (a limited purpose health FSA) or only covers expenses after the individual’s deductible has been met (a post-deductible health FSA). Therefore, if an individual is covered under a general purpose health FSA, he or she may not contribute to an HSA.

The below table provides a high-level overview of the impact the various relief provisions under the Act may have on HSA eligibility and steps employers may take to avoid HSA ineligibility for their employees.

Relief for General Purpose Health FSA Consequence to HSA Eligibility How to Avoid HSA Ineligibility
Enhanced Carryover The individual is not eligible to contribute to an HSA for the subsequent year in which the carryover applies, even if the individual exhausts the carryover and does not make new contributions to the general purpose health FSA in the subsequent year.
  • Allow the individual to waive the carryover.
  • Allow the individual to convert, or automatically convert, the carryover to an HSA-compatible health FSA.
Enhanced Grace Period The individual is not eligible for HSA contributions until the first calendar month commencing after the grace period ends, unless his or her account balance is zero (determined on a cash basis taking into account the universal coverage rules) as of the beginning of the grace period.
  • Allow the individual to opt-out of the enhanced grace period.
  • Allow the individual to enroll, or automatically enroll, the individual in an HSA-compatible Health FSA.
  • Adopt an enhanced grace period of less than 12 months to preserve the ability to make HSA contributions for a portion of the plan year (and potentially full contributions subject to the December 1st rule)
Extended Spend-Down Period The individual is not eligible for HSA contributions until the first calendar month commencing after the extended spend-down period ends, unless his or her account balance is zero (determined on a cash basis taking into account the universal coverage rules) as of the beginning of the extended spend-down period.
  • Allow the individual to opt-out of the extended spend-down period.
  • Allow the individual to convert, or automatically convert, the general purpose health FSA to an HSA-compatible Health FSA.
Mid-Year Election Change An individual who enrolls in a high deductible health plan is not eligible to make HSA contributions if the individual is enrolled in a general purpose health FSA. Conversely, if an individual makes an election change and ceases to be eligible for an HSA, the change does not affect HSA eligibility for the period before the change.
  • Allow the individual to make a mid-year election to revoke participation in the general purpose health FSA. The general purpose health FSA may reimburse expenses incurred only during period while the general purpose health FSA coverage was in effect.
  • Allow the individual to make a mid-year election change to switch from a general purpose health FSA to an HSA-compatible health FSA (or vice versa) to maintain HSA eligibility as needed. The health FSA may reimburse only those eligible expenses that are allowed by the type of health FSA and incurred during the period of coverage for that type of health FSA.