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Rollover from FSA to HSA


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I'm looking for some guidance on the one-time rollver from an FSA to an HSA provision in HR 6111

We put an HDHP/HSA option in place eff. 1/1/07.

Some ee's who were in the FSA for 2006 will incur forfeitures because they overestimated their expenses. Our FSA does not have a grace period.

Our run-out period ends 3/31/07.

Can we give employees the option to rollover any unclaimed balance in their FSA account ? If we don't do it before the end of the run-out period, do they forfeit that money ?

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I'm looking for some guidance on the one-time rollver from an FSA to an HSA provision in HR 6111

We put an HDHP/HSA option in place eff. 1/1/07.

Some ee's who were in the FSA for 2006 will incur forfeitures because they overestimated their expenses. Our FSA does not have a grace period.

Our run-out period ends 3/31/07.

Can we give employees the option to rollover any unclaimed balance in their FSA account ? If we don't do it before the end of the run-out period, do they forfeit that money ?

I've just read IRS Notice 2007-22 on this topic and still have a question on this.

Under the special transitional relief rules, if we want to allow the rollover of 2006 FSA balances, we need to amend our FSA Plan by 3/15/07. The examples given all assume that the FSA has a grace period - which ours does not. Does the FSA have to have a grace period in order for the participants to be allowed to do the one-time rollover ?

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We've looked at this and our tax counsel looked at it and we all came to the same conclusion that the FSA must have a grace period to qualify for the rollover. Otherwise there are no funds to rollover due to the use-it-or-lose-it rule.

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We've looked at this and our tax counsel looked at it and we all came to the same conclusion that the FSA must have a grace period to qualify for the rollover. Otherwise there are no funds to rollover due to the use-it-or-lose-it rule.

Thanks.

The Treasury Dept website has a press release about the guidance http://www.treas.gov/press/releases/hp264.htm and it describes the rollover provision as applying to an FSA with a grace period

I went back and re-read Notice 2007-22 and found this on page 3:

<snip>The amendments in the Act do not change the requirement that unused amounts remaining at the end of a health FSA’s plan year must be forfeited in the absence of a grace period. Notice 2005-42. Thus, if a health FSA does not have a grace period, unused amounts remaining at the end of the plan year are forfeited and generally cannot be transferred through a qualified HSA distribution to an HSA after the end of the plan year. Although the unused amounts can be distributed to an HSA before the end of the plan year, because the health FSA coverage continues until the end of the plan year, an individual covered by the health FSA is not an eligible individual immediately after the qualified HSA distribution, and thus any such qualified HSA distribution is included in income and subject to an additional 10 percent tax. Similarly, an individual without HDHP coverage after a distribution is not an eligible individual after the distribution and thus the qualified HSA distribution is included in income and subject to an additional 10 percent tax. Unless a participant has a change in status as provided in Treas. Reg. § 1.125-4(a), health FSA elections may not be changed during a plan year. Prop. Treas. Reg. § 1.125-1, Q & A-15. <snip>

So, since we don't have a grace period, we can't allow rollovers.

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