Bill Proposes Letting You Roll Over FSA/HRA Funds to an HSA When Switching Health Plans After 2025

This bill proposes a change to how you might manage healthcare funds starting after December 31, 2025. The "Flexible Savings Arrangements for a Healthy Robust America Act" aims to let employees make a direct transfer, called a "qualified HSA distribution," from their health Flexible Spending Arrangement (FSA) or Health Reimbursement Arrangement (HRA) into their Health Savings Account (HSA). This specific type of transfer is only allowed under certain conditions, primarily when an employee enrolls in an HSA-compatible High Deductible Health Plan (HDHP) after a significant period without one.

Shifting Your Savings Strategy

So, how would this work? Imagine you've been using an FSA (where you set aside pre-tax money for healthcare, often with a "use-it-or-lose-it" rule) or an HRA (employer-funded account) and decide to switch to an HDHP paired with an HSA (a tax-advantaged savings account for healthcare that you own). Under this bill (specifically amending Internal Revenue Code Sec. 106(e)(2)), you could move existing funds from your old FSA or HRA directly into your new HSA. This helps prevent forfeiting FSA money and gives your HSA a starting boost. The bill clarifies (amending Sec. 223(c)(1)(B)(iii)) that even after this transfer, holding the FSA or HRA for the rest of the plan year under specific, limited terms wouldn't automatically disqualify you from contributing to the HSA.

Rules of the Road: Limits and Tracking

This isn't an unlimited transfer. The maximum amount you could move in this qualified distribution is capped at the annual FSA contribution limit set by law (under Sec. 125(i)(1)), though this amount doubles if you have family HDHP coverage (Sec. 223(b)(2)(B)). Importantly, any amount you transfer this way directly reduces your regular HSA contribution limit for that year (as per amendments to Sec. 223(b)(4)). Think of it as shifting funds, not adding extra tax-free money beyond the usual HSA limits. To ensure everything is above board, the amount transferred must be reported on your annual W-2 form (amending Sec. 6051(a)), making it trackable for tax purposes.

The Bottom Line: More Flexibility When Changing Plans

If passed, this change offers more flexibility for people transitioning between different types of health plans and savings accounts. It specifically addresses the scenario of moving to an HDHP/HSA setup, potentially making that switch financially smoother by allowing a transfer of funds that might otherwise be stuck or forfeited. It's not a free-for-all annual rollover, but a targeted provision tied to establishing new HDHP coverage, aiming to support the use of HSAs by removing a potential financial barrier during plan changes.