With the end of 2006 fast approaching, many companies are thinking of switching their FSA plans to an HSA program.

As with any new program, HSAs sometimes come in conflict with other offerings unless regulatory adjustments are made.
Employees who have a health FSA this year but have elected to have an HSA may have a problem: they can’t make contributions to their HSA in January if they have not fully expended their 2005 allowances.

If they have not done so, they must wait until the end of the new grace period for FSA use-it-or-lose-it spending which has been extended 2.5 months into next year.

This option leaves them with a much smaller HSA contribution for the year based on the time they start their new HSA. A new IRS notice fixes it for this year, allowing the new HSA owner to make contributions to their HSA during the 2006 FSA grace period as long as there is no remaining money in their FSA, or if the employer exempts all HDHPs from the requirement.

Unless some changes are made in the regulations, next year FSAs and HSAs will be much less compatible—anybody with an FSA going into an HSA must wait out the exemption period unless the employer drops the grace period, which a lot of HSA backers would love to see happen so more people go into HSAs.

Another option: just drop health FSAs entirely before the end of next year or, best practice, replace them all with HSAs combined with post deductible FSAs across all workers. The HSA-FSA combo is now mentioned so often as the best approach.