The U.S. Treasury and Internal Revenue Service have issued guidance regarding how employers can rollover unspent funds in their employees' health Flexible Spending Arrangements (health FSAs) and Health Reimbursement Arrangements (HRAs) to Health Savings Accounts (HSAs), as permitted by the Tax Relief and Health Care Act of 2006 (Public Law No. 109-432). This law, enacted December 20, 2006, allows employers to amend their health FSAs or HRAs for a one-time rollover to an HSA by 2012.

However, the guidance released does not cover any of the other provisions enacted in P.L. 109-432. Treasury intends to issue additional guidance soon on these remaining provisions.

The guidance released clarifies the requirements for making rollovers from health FSAs and HRAs.  They include:

1. The rollover must be made directly to the custodian or trustee of the HSA.

2. An HRA or health FSA with a grace period (up through March 15) must be amended and a rollover selected by an employee before year end. The balance amount must be transferred to the HSA by March 15 of the following year.

3. Under a special transition rule for transfers for 2006, the amendment, election and transfer must take place by March 15, 2007.

The guidance provides 13 examples to help clarify the details of the guidance.
U.S. Treasury and Internal Revenue Service today issued guidance regarding how employers can rollover their health Flexible Spending Arrangements (health FSAs) and Health Reimbursement Arrangements (HRAs) to Health Savings Accounts (HSAs) for their employees. The Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, enacted December 20, 2006, allowed employers to amend their health FSAs or HRAs, with balances on September 21, 2006, for a one-time roll over to an HSA by 2012. The guidance clarifies the requirements for making these rollovers, which must be made directly to the custodian or trustee of the HSA.

There are quite a few steps to take between now and March 15th.

Unfortunately, employers that were hoping for guidance on how (and whether) qualified HSA distributions could be used in mid-year transitions, such as a termination of a general-purpose health FSA or HRA or a conversion (for all participants) to an HSA-compatible health FSA or HRA, will need to wait longer--this guidance addresses year-end transfers only.  At the same time, this guidance states that "qualified HSA distributions from health FSAs or HRAs that are not HSA-compatible and that take place at any time other than the end of a plan year" will generally result in adverse tax implications. We hope more IRS guidance will be issued soon addressing the many unanswered questions that linger for employers wanting to facilitate mid-year HSA eligibility for health FSA or HRA participants who are transitioning to HDHP coverage.

Click here to download a PDF of the new guidance