When transitioning from a Medical FSA to an HSA, you need to make sure you understand when you become HSA eligible. Here are a few simple steps to use to determine when you become HSA eligible.
- Determine when your Medical FSA coverage ends. If your Medical FSA coverage ends before your HSA-compatible health plan coverage begins, you are HSA eligible on the first date of your health insurance plan coverage. If Medical FSA coverage continues after your HSA-compatible health plan coverage begins, you need to further evaluate when you become eligible.
- Determine if you have overlapping coverage. While enrollment in your health plan and your Medical FSA typically occurs at the same time, your employer may have overlapping plan years where the health insurance plan enrollment begins before the current Medical FSA plan year ends. If you have overlapping plan years, you will not be eligible until the first of the month following the end of the Medical FSA plan year. An Extended Grace Period (EGP) is generally considered part of the plan year for purposes of HSA eligibility and you would not be eligible to contribute to the HSA until the first of the month following the end of the EGP.
There are two exceptions that exist where you become HSA eligible as of the first day of HSA-compatible plan coverage with overlapping coverage:
- Extended Grace Period (EGP) offered as a Limited Medical FSA. If your employer offers EGP as a Limited Medical FSA to all entitled participants, you are HSA eligible on the first date of your HSA-compatible health plan coverage.
- Medical FSA balance at end of plan year. If you have a $0 balance in your Medical FSA at the end of your plan year, (e.g. your plan year is from January 1 – December 31, and your account balance is $0 on December 31), you are HSA eligible on the first date of your HSA-compatible health plan coverage.
If you have a balance in your Medical FSA greater than $0 at the end of your plan year and your employer offers EGP, you will not be HSA eligible until the first of the month following the end of the EGP, even if your account balance reaches $0 at an earlier point during the grace period.
