Publication 969 - Health Savings Accounts And Other Tax-Favored Health Plans

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Qualified medical expenses are those incurred by the

The funds must be transferred within 2

months

following persons.

after the end of the health FSA’s plan year and result

in a zero balance in the health FSA.

1. You and your spouse.

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The distribution must be contributed directly to the

2. All dependents you claim on your tax return.

HSA trustee by the employer.

3. Any person you could have claimed as a dependent

Only one qualified HSA distribution is allowed for each

on your return except that:

health FSA.

a. The person filed a joint return,

For more information, see Notice 2007-22, 2007-10

I.R.B. 670 available at

b. The person had gross income of $3,650 or more,

html.

If you do not remain an eligible individual for HSA

c. You, or your spouse if filing jointly, could be

purposes during the testing period, the distribution is in-

claimed as a dependent on someone else’s 2010

cluded in your income and is subject to a 10% additional

return.

tax. See

Qualified HSA distribution

under Health Savings

Accounts (HSAs), earlier.

4. Effective March 30, 2010, your child under age 27 at

the end of your tax year.

Qualified reservist distribution. A special rule allows

You cannot receive distributions from your FSA for the

amounts in a health FSA to be distributed to reservists

following expenses.

ordered or called to active duty. This rule applies to distri-

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Amounts paid for health insurance premiums.

butions made after June 17, 2008, if the plan has been

amended to allow these distributions. Your employer must

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Amounts paid for long-term care coverage or ex-

report the distribution as wages on your Form W-2 for the

penses.

year in which the distribution is made. The distribution is

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Amounts that are covered under another health plan.

subject to employment taxes and is included in your gross

income.

If you are covered under both a health FSA and an HRA,

see Notice 2002-45, Part V, which is on page 93 of IRB

A qualified reservist distribution is allowed if you were

2002-28 at

(because you were in the reserves) ordered or called to

active duty for a period of more than 179 days or for an

indefinite period, and the distribution is made during the

You cannot deduct qualified medical expenses as

period beginning on the date of the order or call and ending

an itemized deduction on Schedule A (Form

on the last date that reimbursements could otherwise be

1040) that are equal to the distribution you re-

made for the plan year that includes the date of the order or

CAUTION

ceive from the FSA.

call.

Qualified HSA distribution. This is a distribution from

Balance in an FSA

your health FSA that is transferred to your HSA, discussed

earlier. The distribution must not be more than the lesser of

Flexible spending accounts are “use-it-or-lose-it” plans.

the balance in the health FSA on:

This means that amounts in the account at the end of the

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September 21, 2006, or

plan year cannot be carried over to the next year. How-

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ever, the plan can provide for a grace period of up to 2

The date of the distribution.

months after the end of the plan year. If there is a grace

If you were not covered by a health FSA on September 21,

period, any qualified medical expenses incurred in that

2006, you cannot elect to make a qualified HSA distribution

period can be paid from any amounts left in the account at

from the health FSA. If you were covered by a health FSA

the end of the previous year. Your employer is not permit-

with an employer on September 21, 2006, but change

ted to refund any part of the balance to you. See

Qualified

employers after that date, you cannot elect to make a

HSA distribution

and

Qualified reservist

distribution, ear-

qualified HSA distribution from your second employer’s

lier.

health FSA.

The following conditions must be met to make a qualified

Employer Participation

HSA distribution.

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For the health FSA to maintain tax-qualified status, em-

The plan must have been amended to allow these

ployers must comply with certain requirements that apply

distributions.

to cafeteria plans. For example, there are restrictions for

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You must elect to make the rollover.

plans that cover highly compensated employees and key

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employees. The plans must also comply with rules applica-

The year-end balance in the health FSA must be

frozen.

ble to other accident and health plans. Chapters 1 and 2 of

Publication 969 (2010)

Page 17

Publication 969 - Health Savings Accounts And Other Tax-Favored Health Plans - 2010 Page 17

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