FSA plan termination/merger

[cathyw]

An employer maintains a calendar year cafeteria plan with health FSAs, dependent FSAs and premium conversion. The employer is acquired and becomes part of a large controlled group. The parent of the controlled group establishes a group medical program and cafeteria plan (with health FSAs, dependent FSAs and premium conversion) effective 1-1-06. This employer decides to stay under it's existing group medical (and cafeteria) plan until at least renewal on 8-31-06.

Now the employer wants to join the controlled group plans as of 9-1-06. The major difference in the cafeteria plans is that the health FSA limit is substantially greater in the controlled group plan. Can the employer terminate its cafeteria plan and join the controlled group plan for the remainder of the year? If yes, would the employees be able to make new FSA elections under the controlled group plan for the remainder of the year, and use up the existing FSA balances under the old plan?

If the employer can't terminate the old plan and adopt the new plan mid-year, can the plans merge? Even if possible, I assume that the employees could not make a new election under the terms of the merged plan to take advantage of the increased FSA limit, so I don't really see any benefit to this option.

Obviously, the old plan can continue until 12-31-06 and then be terminated, with the employer adopting the controlled group plan for 2007. Are there any other options?