Relief for Interaction of FSA Grace Period and HSA Contribution Eligibility

November 23, 2005 – The IRS has issued Notice 2005-86, which may make certain individuals, who were disqualified by earlier IRS guidance, eligible to contribute to health savings accounts (HSAs).  The earlier IRS guidance, Notice 2005-42, allows employers to amend their health flexible spending account (FSA) plans to allow employees to use FSA balances existing as of the end of the FSA plan year to pay medical expenses incurred within a 2½ month grace period immediately following the end of the FSA plan year. Without this extension, any FSA balances remaining at the end of the FSA plan year would be lost.  In general, such an FSA amendment would, under earlier guidance, make certain employees ineligible to contribute to an HSA during the grace period.  Notice 2005-86 now provides options and transition relief to make HSA contributions possible for certain employees who would have been disqualified under prior guidance. 

Notice 2005-86 may be accessed at http://www.irs.ustreas.gov/pub/irs-drop/n-05-86.pdf.