The Treasury and IRS have issued Notice 2005-86 which provides guidance regarding the interaction of the 2-1/2 month flexible spending arrangement ("FSA") grace period (established earlier this year by Notice 2005-42) and eligibility to contribute to health savings accounts ("HSA"). The guidance confirms that coverage by the FSA grace period disqualifies an individual to contribute to an HSA during the grace period. However, the notice also provides some limited ways that an FSA can be amended to enable a covered individual to contribute to an HSA during the grace period and clarifies a number of technical questions concerning the grace period.
The notice provides a special transition rule for coverage years ending before June 5, 2006. For those years, an otherwise eligible individual may contribute to an HSA during coverage by a health FSA grace period if the individual's health FSA has no unused contributions or if the employer amends the cafeteria plan to provide that the grace period is not available to individuals electing HDHP coverage during the grace period.
Read the press release here.
Posted by B. Janell Grenier at November 23, 2005 09:44 AM