A flexible spending account, also known as a flex account or FSA, is an account employers can offer to employees to cover IRS-approved medical expenses. Flex account money must be used by the end of the plan year, or it will be forfeited. A health savings account , or HSA, holds pretax dollars for the same purpose. You can only open an HSA if your health insurance policy has what the IRS considers a high deductible. Unlike the FSA, if you do not spend your HSA funds each year, the money stays in the account and continues to grow tax-deferred, even if you leave your employer. Anyone who has both types of accounts can make a one-time, tax-free transfer of the balance from the FSA to an HSA as long as that person remains eligible for an HSA for a year following the transfer. Consult a tax or financial professional, as well as a benefits specialist if necessary, to be sure you are complying with current tax law when you make the transfer.
Step 1
Check with your FSA plan administrator. You need to be sure your FSA plan allows this type of rollover. Not all plans do, so ask your employer to confirm that you will be allowed to make the transfer.
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Step 2
Elect to make the transfer. Contact your FSA plan administrator to let her know you want to rollover from your FSA to an HSA. If your company's plan requires that certain forms be filled out, she will inform you about them.
Step 3
Ask to have your FSA balance frozen. According to the IRS, before you can make an FSA to HSA transfer, "the year-end balance in the health FSA must be frozen." Your plan administrator will be able to put this into effect.
Step 4
Find out when your plan year ends from your FSA plan administrator. According to IRS regulations, the rollover must go into effect within two-and-a-half months of your plan year's end. For example, if your plan year ended Dec. 31, 2009, you would have to make the transfer before March 15, 2010.
Step 5
Zero out your FSA when you make the transfer. You cannot transfer only a portion of your FSA funds to an HSA. The IRS stipulates that the rollover must "result in a zero balance in the health FSA."
Step 6
Ask your FSA plan administrator to make a direct transfer to your HSA trustee. The IRS will not accept anything but a direct transfer of funds for the rollover. You cannot zero out your FSA, receive a check for the funds, and then contribute them to your HSA. The money must be rolled over directly.
Step 7
Hold on to your HSA eligibility for 12 months after the transfer. This might sound odd, but this rule is in place to prevent folks from making the transfer, dropping their high-deductible health plan, and skipping off with a stash of tax-free money that will grow tax-deferred until age 65. So, for example, if you complete your FSA-to-HSA rollover March 2, 2010, you will have to remain eligible for an HSA, which means keeping your high-deductible health plan, until at least March 31, 2011. If you run afoul of this rule, you will have to pay income tax on the money transferred from your FSA in addition to a 10 percent penalty on those funds.
Tip
Talk to your benefits administrator, as well as a tax professional, to be sure you are clear on the risks and rewards before taking steps toward this transfer.
Warning
IRS rules can change. Be sure you and your financial and/or tax adviser are up to date on the law before any transfer goes into effect.
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