No, coverage by an FSA grace period disqualifies an individual from contributing to an HSA during the grace period even if the individual has no carryover funds or has spent all of his or her FSA monies.

However, the IRS has issued guidance on how an FSA can be amended to enable a covered individual to contribute to an HSA during the grace period. Specifically, an employer can convert a general purpose FSA to:

• a limited purpose FSA (i.e., one covering only permitted dental, health, or preventive care expenses),
• a post-deductible health FSA (i.e., an FSA that reimburses expenses incurred after the high-deductible health plan (HDHP) deductible has been satisfied) or
• a combination of both of these.

Transition relief. The IRS also has issued a transition rule for plan years ending before June 5, 2006. Under this transition rule, individuals participating in a general purpose FSA that provides coverage during a grace period would be eligible to contribute to an HSA during the grace period if the following requirements are met:

• the individual is otherwise eligible to contribute to an HSA, and
• either:
1. the individual’s (and the individual’s spouse’s) general purpose health FSA has no unused contributions remaining at the end of the preceding plan year, or
2. in the case of an individual who is not covered during the grace period under a general purpose health FSA maintained by the employer of the individual’s spouse, the individual’s employer amends its plan document to provide that the grace period does not provide coverage to an individual who elects HDHP coverage.