In recent years, our household has shifted from one employer’s high deductible health plan (HDHP) paired with a health savings account (HSA), to another employer’s PPO plan, which is sadly not compatible with an HSA. Having socked away the maximum HSA contribution for a number of years previously, we’ve simply been withdrawing funds from that old HSA to pay for current qualified medical expenses not covered by the PPO plan.
Now that we’ve had a few years under our belts with the new PPO plan and have a multi-year history of out of pocket expenses, we’ve re-evaluated that strategy and have decided to add a new flexible spending account (FSA) into the mix in order to stop depleting funds from our HSA and get the benefits of additional new untaxed funds for health care expenses. While crunching the numbers to decide how much to contribute annually to the FSA during open enrollment, I was facing the typical FSA “use it or lose it” fears, and an opportunistic question popped into my head: “Can you transfer funds from an FSA to an HSA account?”. Let’s dig in to the answer.
FSA to HSA Rollover: Can you Transfer Funds from an FSA to an HSA?
It’s a logical question to ask. The IRS has fairly generous retirement account rollover compatibility rules. It is possible to transfer 401K funds to an IRA (and vice versa). It is possible to transfer HSA funds to another HSA (I’d highly recommend transferring funds to one of the best HSA accounts, if you haven’t already). It is even possible to transfer IRA funds to an HSA. Given all that, why wouldn’t you be able to also transfer funds from one type of qualified health expense account (an FSA) to another type of qualified health expense account (an HSA)?
Being able to transfer unused funds from an FSA to an HSA would solve the “use it or lose it” fears and injustices associated with FSAs. Employers have the option (but are not required) to offer employee FSA participants a “grace period” up to 2.5 extra months to use FSA funds contributed in the prior year or carry over funds from one year to the next (the 2022 to 2023 maximum FSA carryover amount is up to a maximum of $610, or 20% of the maximum annual FSA contribution amount, which is annually adjusted to inflation). Beyond this, unfortunately, any funds not spent on FSA-eligible qualified medical expenses by the deadline are forfeited back to the employer.
So, is an FSA to HSA rollover possible? Can you transfer funds from an FSA to an HSA?
Sadly, the answer is no on both accounts. The IRS does not allow FSA participants to transfer funds from an FSA to an HSA or complete a full FSA to HSA rollover. Health reimbursement arrangement (HRA) to HSA transfers are also not permitted.
Why Can’t You Transfer Funds from an FSA to an HSA?
The IRS is not explicit about why you cannot transfer funds from an FSA to an HSA. The two types of accounts have similar qualified medical expense rules, contributions to both are deductible, and withdrawals to both are tax-free – so it would make perfect sense for the IRS to permit the transfer of funds from an FSA to an HSA (the reverse – an HSA to FSA transfer – would not make sense as HSAs have employee ownership and retirement benefits that FSAs do not have, and no “use it or lose it” rule).
It is possible that this has something to do with account ownership. Employees own their HSA accounts, but employers own FSA accounts. In fact, some employers explicitly state that unused FSA funds (even funds contributed by employees) go back to them and can be used to help cover the cost of administration. Another possibility is that the IRS wants to limit total deductions by taxpayers towards these types of accounts.
It’s worth noting that it is possible to contribute to both an HSA and FSA in the same year, if your employer offers compatible plans. To be compatible, the FSA must be designated as a “limited purpose FSA” (not the more common “general purpose FSA”) in order to be HSA compatible. Limited purpose FSAs are typically limited to paying for vision and dental expenses – at least before you’ve met your annual insurance deductible. Some limited purpose FSAs can also be used for other qualified medical expenses after the annual deductible has been met, but these rules can vary by employer.
So, there you have it. My condolences to the other similar-minded opportunistic tax-deduction maximalists out there.
For more info on FSAs, HSAs, and tax-deductible qualified medical expenses, check out the above links in this article and IRS Publication 969.