How does an HSA interact with the FSA grace period?
Should an employer modify the FSA through a plan amendment – to incorporate the grace period, plan participants will be able to apply unused FSA balances for health & dependent care expenses incurred in the first two & one-half months of the following plan year. Once a plan is modified, an employee covered by the FSA grace period cannot contribute to an HSA during that grace period. Employers may, however, convert their health FSA to an HSA-compatible arrangement that allows a health FSA participant to become HSA-eligible during the grace period. These HSA-compatible arrangements may include: a limited purpose FSA to pay or reimburse only for preventive care and permitted coverage; or a post-deductible health FSA to pay or reimburse preventive care & other qualified medical expenses incurred after the minimum annual deductible for the health plan has been satisfied.
