The High Deductible Health Plan (HDHP), by its very name, infers more cost to the participant than a traditional health plan. But the use of HDHPs comes with a very interesting and valuable side feature. Only HDHPs allow the employee to set up a savings account that both employer and employee can contribute pre-tax dollars to, and the user can use those dollars to pay for any IRS-recognized medical expense.  These accounts also have the added tax benefit of investment gains accruing on a tax favored basis, similar to 401K investment accounts. These accounts are called Health Savings Accounts or HSAs.

You can say these accounts have been around for years, and they have in the slightly different form of Flexible Spending Accounts (FSA).  But the unique feature of the HSA is that the contributions never forfeit back to the company. FSAs have always had a use-it-or-lose-it feature, where the funds not spent during the current year are forfeited and are no longer the property of the employee-participant. There are other types of FSA including the Limited Purpose Health FSA, the Post-Deductible Health FSA, or a combination of both.

ASE’s 2013 Michigan Policies and Benefits Survey reports that between 28-30% of non-union employers now have High Deductible Health Plans with HSAs. Further according to the data, the employer contributes an average of $671 for a single and approximately $1,330 for a family into the HSA. Employees may contribute even more.

Last year the IRS issued new regulations (Notice 2013-71) that allow employers to amend their Section 125 cafeteria plans to provide for the carryover of up to $500 in unused health FSA contributions to the immediately following plan year. While this step provided a much-wished-for easing of the use-it-or-lose-it rule, it has also created some confusion for employers who have both a High-Deductible Health Plan with an HSA and also a health FSA with a carryover feature. The IRS Office of Chief Counsel has issued Memorandum 201413005 and answered some questions that concern the health FSA carryover and HSA eligibility, including these:

1. An individual who is covered by a health FSA is not an eligible individual for purposes of making contributions to an HSA.
    
2. An individual covered by a general-purposed health FSA solely as the result of a carryover of unused amounts in a health FSA may not contribute to an HSA for the rest of the plan year, even after the carried-over funds have run out.
    
3. An individual who participates in a general purpose health FSA, and elects for the following year to participate in an HSA-compatible health FSA (such as a limited purpose health FSA, a post-deductible health FSA, or a combination of both), may elect to have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA.
   
   This individual is eligible to contribute to an HSA during the following year if he or she is otherwise eligible to contribute to an HSA.
    
4. A cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may automatically treat an individual who elects coverage in a HDHP for the following year as enrolled in the HSA-compatible health FSA. It can then carry over any unused amounts from a general purpose health FSA to the HSA-compatible health FSA for the following year.
    
5. An individual who participated in a general purpose health FSA that provides for a carryover of unused amounts, may decline or waive the carryover for the following year. In that case, the individual may contribute to an HSA during the following year, if the individual is otherwise eligible to contribute to an HSA.

Why would a company have both an FSA and also a more flexible and less burdensome HSA? Ms. Becky McLaughlan, Managing Director of McGraw Wentworth, explained it this way:

The FSA rollover election rules implemented late last year started allowing FSAs to roll over some employee contributions amounts leftover from 2013. Due to the late release of rules, many employers had no time to implement the rollover and had plenty of questions. The guidelines released last week answered some of employers’ questions.

The use of two types of spending account approaches is intended to assist with medical costs not covered by many plans these days. As such they are intended to complement each other. First the traditional FSAs are used where a high deductible plan is not offered. Second, many employers offering a true HDHP make it part of a selection of health plans, not just a HDHP. But because HSAs can only be offered for the HDHP, the traditional FSA can be used with the other plan(s).  These same employers also typically offer a limited purpose FSA designed for their HDHP enrollees.  These more limited FSA plans offer the tax advantages of an FSA for dental and vision expenses and allow the plan to remain compliant with the HSA regulations.

Source: CCH What’s New 4/4/2014