Health FSA and M & A

[Guest Brenda N.]

A business is being purchased in an asset sale. The health FSA of the business has a higher contribution rate than the health FSA of the company purchasing it. The buyer is considering allowing the employees from the purchased business to retain the their health FSA with the higher contribution rate. Does anyone know of possible problems with this. It's my understanding that the Cafeteria Plan rules do not address mergers and acquisitions. If the buying group should decide to make the employees subject to the buying groups current FSA, would the employees of the selling group have to forfeit any balance they make have that exceeds the buying groups allowed contribution - or can those balances be refunded to the employees (subject to tax)?

Thanks for any assistance.

Brenda

[papogi]

Keeping the original contribution rate for the rest of the 12-month period is the best way to go, then have them make new lower elections for next year. With the absense of clear guidance from the IRS, I can't think of any current problems with this approach, as long as HCE's are not favored.