Can a participant contribute to an HSA if they have an FSA with a grace period?

January 14, 2025

This will depend on whether the FSA participant has a balance at the end of the plan year.

As background, an FSA grace period is a designated period after the end of the plan year during which participants can incur services and be reimbursed with funds remaining from the prior plan year election. The grace period cannot be longer than 2-1/2 months, but it can be shorter. For FSA plans with a grace period, an employee who has an undistributed cash balance in the FSA plan on the last day of the FSA plan year (regardless of whether qualified expenses have been incurred) is deemed to have impermissible coverage until the first day of the first month following the end of the grace period. Pending claims, claims submitted, claims received, or claims under review that have not been paid as of the plan year end date are not considered.

An employee with a zero-dollar balance at the end of the plan year under an FSA with a grace period is considered HSA‐eligible during the grace period (assuming the employee is otherwise HSA-eligible), as the IRS permits FSA coverage during a grace period to be disregarded under these “zero dollar” circumstances for the purpose of determining HSA eligibility.

However, note that FSA participants are not permitted to forfeit any portion of their year-end FSA balance to achieve a zero-dollar balance as of the start of the new plan year. Additionally, an FSA with a grace period can be amended before the end of the plan year to which the grace period applies such that the FSA becomes a limited-purpose FSA during the grace period. Keep in mind that this conversion of a general-purpose FSA to a limited-purpose FSA during the grace period must apply to all FSA enrollees, not just those who seek to be HSA-eligible in the subsequent plan year.

For further information, please download a copy of the PPI publication Health Savings Accounts: A Guide for Employers.