Grace Period Relief

Previously an individual who had an FSA with a grace period was not allowed to contribute to an HSA until the FSA grace period had expired. The new rule now allows an individual to establish or contribute to an HSA as long as he or she has either: (a) a zero balance in the FSA on the last day of the plan year or (b) transfers the entire balance to the HSA as of the last day of the plan year. Rollovers for the FSA grace period are only allowed one-time.

Examples

Bob participates in a calendar year Health Care FSA in 2006 with a 2 ½ month grace period. Bob has a $0 balance on December 31, 2006. Under the new rules, Bob is eligible to contribute to an HSA on January 1, 2007.

Kathy participates in a calendar year Health Care FSA in 2006 with a 2 ½ month grace period. Kathy has a $1000 balance she transfers to an HSA prior to December 31, 2006. As a result, Kathy is eligible to contribute to an HSA effective January 1, 2007.

Under the prior rule, Bob and Kathy would not have been eligible to participate in an HSA until April 1, 2007 (the beginning of the first full month following the end of the grace period).

What are the benefits of this change?

This rule makes it more attractive for an individual with an FSA grace period to move to a high deductible health plan with an HSA.

If you have questions, employers should contact their Humana Sales Representative.
Brokers should call Humana’s Spending Account Hotline at 800.281.6778.