Flexibility in Flexible Spending

Generally, an individual who is participating in a health FSA is not eligible to contribute to an HSA until the first day of the first month following the end of the 2.5-month grace period, even if the individual's health FSA has no unused benefits at the end of the prior cafeteria plan year. However, Notice 2005-86 provides that an employer may amend the cafeteria plan document to enable a health FSA participant to become eligible to contribute to an HSA during the grace period. For cafeteria plan years ending before June 5, 2006, an individual participating in a health FSA that provides coverage during a grace period will be eligible to contribute to an HSA during the grace period if: 1) the person would be an “eligible individual” (as defined in Section 223(c)(1)(A)) during the grace period but for the coverage under a general purpose health FSA described in clause (2); and 2) either (a) the individual's (and his spouse's) general purpose health FSA has no unused contributions or benefits remaining at the end of the preceding cafeteria plan year, or (b) in the case of someone who is not covered during the grace period under a general purpose health FSA maintained by his spouse's employer, the individual's employer amends its cafeteria plan document to provide that the grace period does not provide coverage to an individual who elects HDHP coverage.