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FSA roll-over


Guest kredlin

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Guest kredlin

Can the balance in a participant's medical FSA be transferred to an FSA under another plan? We have a situation where a subsidiary is merging into the parent and its employees will become covered under the parent's benefits plan, including its FSA. We are worried about what will happen to balances in employees' current FSA's.

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I don't believe there is anything in Section 125 that address how cafeteria plans are treated in the event of a merger or acquisition. I think part of the answer will depend on what the acquiring firm's intentions are relative to the target company. They could arrange for an FSA transfer to the new benefit plan, if they are rolling the target employees into a new plan and assuming the benefit obligations of the target company (as opposed to terminating them). Or they could run the plan out to the end of the normal plan year and offer the new plan. My personal experience in this area was that the acquiring firm let the target firm's plan continue to the end of the plan year, then terminated that plan design and offered all merged employees one plan. I think either option is available, including rolling the FSA balances over, since the regs don't address it.

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What is the authority or precedent for rolling it over? PLR, RR, Regs?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I've never seen this is the regs, either, but I have personally seen the practice numerous times. In the FSA, the employee enters into an agreement with the employer, regardless how many administrators handle the account in a plan year. The regs always refer to the "employer's FSA". It doesn't matter who is administering the FSA. These employees would not be classified as changing employers, even though the name on their paychecks may change. They didn't terminate, be offered COBRA, and start a new job.

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  • 3 months later...
Guest Hadden2001

I have received informal advice from the IRS that you can spin-off the assets of an FSA in a merger situation.

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Guest CRobinson

** From EBIA Weekly 6/13/02 **

What happens to the health FSA coverage of employees who are terminated when their employer sells assets of its business to a buyer who rehires those employees? In IRS Rev. Ruling 2002-32, the IRS provides guidance about how a buyer and seller who wish to continue the health FSA coverage of the transferred employees may do so, either under the seller's health FSA or under the buyer's health FSA. The IRS concludes that in the two scenarios it describes, since the transferred employees do not lose eligibility for health FSA coverage as a result of the asset sale (they retain eligibility either under the seller's health FSA or the buyer's health FSA), no mid-year election change is permitted under Treas. Reg. Sec. 1.125-4. "Therefore, transferred employees continue to be subject to their existing FSA elections and may not change those elections during the remainder of the plan year of the asset sale (unless an event occurs thereafter which permits an election change under 1.125-4)." The following two scenarios represent IRS-approved ways of handling health FSAs in an asset sale:

==> COVERAGE CONTINUES UNDER SELLER'S HEALTH FSA; SALARY REDUCTIONS CONTINUE UNDER BUYER'S CAFETERIA PLAN. In the first scenario, the selling employer has a health FSA funded entirely with employees' pre-tax salary reductions under a cafeteria plan. During a plan year, the selling employer sells a portion of its business assets to a buyer who hires the transferred employees. The seller continues its business operations after the asset sale and continues to maintain its health FSA. The buyer either has or will create a cafeteria plan that offers health FSA coverage through pre-tax salary reductions. The seller and buyer agree to have the transferred employees continue to participate in the seller's health FSA for an agreed-upon period (for example, through the end of the plan year). The seller and buyer also agree on the extent to which the original salary reduction elections made under the seller's plan will continue as if made under the buyer's plan.

==> BOTH COVERAGE AND SALARY REDUCTIONS CONTINUE UNDER BUYER'S PLAN. In the second scenario, the buyer agrees to cover the transferred employees under its health FSA for the remainder of the plan year. The health FSA account balances under the seller's health FSA will be rolled over to the buyer's health FSA. As in the first scenario, the seller continues its business operations after the asset sale and continues to maintain its health FSA. All claims for reimbursement after the asset sale, however, will be submitted to the buyer's health FSA (even claims incurred before the asset sale but not yet reimbursed). The transferred employees' salary reductions will continue to be made for the balance of the plan year through the buyer's plan. To accomplish these results, both buyer and seller will amend their plan documents as described in the IRS Ruling. For example, the buyer will amend its health FSA (or adopt one) to provide that the transferred employees become participants in buyer's health FSA as of the first day of the seller's plan year at the same level of coverage they had under the seller's health FSA and carrying over their account balances, except that transferred employees who continue participation in S's health FSA after the sale by electing COBRA are not covered by buyer's health FSA. And seller will amend its plan documents to provide that the transferred employees cease to be eligible for reimbursements under seller's health FSA after the asset sale, except to the extent of any COBRA continuation coverage election.

In addition to presenting the above two ways to handle health FSA elections after an asset sale without violating cafeteria plan rules, the IRS Ruling also addresses COBRA issues. The IRS concludes that the transferred employees in the first scenario (coverage under seller's plan; salary reductions under buyer's plan) do not suffer a loss of coverage under the seller's health FSA during the plan year. Thus, if the seller's health FSA satisfies the requirements of Q&A-8© in Treas. Reg. Sec. 54.4980B-2 (the COBRA regulation governing the limited COBRA obligation for health FSAs that are HIPAA-excepted benefits and that meet certain other conditions) there is no obligation to make COBRA coverage available to transferred employees with respect to their coverage under the seller's health FSA. However, if the seller's health FSA does not satisfy the requirements of Q&A-8© and the seller is otherwise subject to COBRA, then it will be obligated to make COBRA coverage available beginning on the first day of the plan year after the year in which the asset sale takes place (it would appear that the employer would not need to offer a full 18 months of COBRA coverage but only the balance of the 18-month period, so that, for example, if the asset sale occurred six months into the plan year, only 12 months of COBRA coverage would need to be offered after the end of the plan year). In the second scenario (both coverage and salary reductions under buyer's plan), the IRS concludes that obligation of the seller to extend to COBRA qualified beneficiaries the right to elect COBRA "is not affected by the coverage provided by [the buyer]." In other words, the seller must offer COBRA even though similar coverage may be available under the buyer's plan. See Treas. Reg. Sec. 54.4980B-9, Q/A-8(d), Example 5. Of course, the seller's COBRA obligation may be limited if it satisfies the requirements of Q&A-8© (e.g., COBRA would not need to be offered if a transferred employee had overspent her account as of her termination and loss of coverage on the asset sale date). Note that scenario two is designed to avoid double coverage--if a transferred employee elects COBRA under the seller's health FSA, then that employee is ineligible for coverage under the buyer's health FSA.

EBIA Comment: This Revenue Ruling contains good news for employers and administrators involved in an asset sale (the ruling does not apply to stock sales). When the parties' intent is to let the transferred employees' health FSA coverage continue uninterrupted through the end of the plan year, the parties will no longer will need to formulate strategies in a vacuum of official guidance. We now have two officially sanctioned ways to handle health FSA elections when an asset sale occurs.

The Revenue Ruling raises several issues. In the first IRS-approved scenario, coverage continues under seller's plan but salary reductions may continue under buyer's plan. This runs counter to the norm, where salary reductions under an employer's cafeteria plan are used to pay for benefits sponsored by that same employer. It is perhaps the unique nature of health FSAs in an asset sale that prompted the IRS to approve this scenario. While employers and administrators may be tempted to stretch the Ruling's approval of the first scenario to other asset sale situations (e.g., salary reducing under a buyer's plan to pay for health insurance under a seller's plan), there is no indication in the Ruling that the IRS meant for it to apply outside of the health FSA context. Also note that if salary reductions are made under the buyer's plan but the seller has the reimbursement obligation, the seller will bear the full cost of the benefits. One way to avoid this result would be for the seller to increase the purchase price of the assets to reflect the expected salary reductions that will be made under the buyer's plan through the end of the plan year.

Other issues are raised by the second scenario. Though the second scenario, like the first, involves a seller that continues its business operations after the asset sale and continues to maintain its health FSA, it seems to us that the general approach in the second scenario should apply equally when the seller goes completely out of business--in such case it ought to be equally permissible to roll over the transferred employees' elections and account balances to the buyer's health FSA. Also, we wonder how the IRS Ruling applies to DCAPs. While we do not believe that the Ruling can be stretched to permit salary reductions under the buyer's plan to pay for DCAP coverage under a seller's plan, it seems that the parties to an asset sale ought to be able structure things like in scenario two so that existing DCAP elections and account balances are rolled over to the buyer's plan (with salary reductions after the asset sale being made under the buyer's plan and DCAP reimbursements being made under the buyer's plan). Perhaps the IRS will address the DCAP issue in future guidance.

For further information about how mergers and acquisitions impact the operation of a cafeteria plan, including health FSAs, see EBIA's Cafeteria Plans manual at Section XVI.J ("Selected Cafeteria Plan Design and Administration Issues: Mergers and Acquisitions"). Note particularly Section XVI.J.3.a, where we discuss "Health FSA Elections and Account Balances" -- this subsection is in the process of being updated to reflect the new IRS Ruling, and will be shipped to subscribers later this month. Also see EBIA's COBRA manual at Section XII ("COBRA in Mergers, Acquisitions and Other Business Arrangements

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  • 5 months later...

Most the posts talk around this, but my situation is a little different.

One company merged (took over) another. The company that was taken over had an FSA. The take-over firm did not. Can I roll the plan out for all employees after the end of this plan year?

There would be no exchange of funds, only a bigger administrative burden to carry.

I appreciate any thoughts.

Thanks,

Lee

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