Terminating a plan and starting a new one

[SLuskin]

I have a client who does self-funded health ins. administration, but uses us for the FSA/dcap. They have a calendar year flexible spending plan. They want to start an HSA March 1, 2008. They want a 2 month year, just January and February 2008, then terminate that plan. Then start a new plan March 1, 2008 with dcap, but only limited purpose FSA,and have that be a short plan year ending 12/31. First new full plan year would be 1/1/09 to 12/31/09. They do not have the 2 month and 15 day extension period.

Does anyone have any thoughts on this? Thanks. My call with them to discuss is Thursday at 9:30.

[J Simmons]

The new regs require a valid business purpose for a change in plan year, in order to prevent manipulation of the 12 month election rules. This would look manipulative, and then there's always the step-transaction doctrine to collapse it into being just an attempt mid-year to give employees a chance to change their elections.

Better to keep all things as is, but add the HSA/limited health FSA option mid-year. For those that have already elected the unlimited health FSA for the year, I don't think that adding HSA mid-year permits them to end the unlimited health FSA early.

[SLuskin]

The new regs require a valid business purpose for a change in plan year, in order to prevent manipulation of the 12 month election rules. This would look manipulative, and then there's always the step-transaction doctrine to collapse it into being just an attempt mid-year to give employees a chance to change their elections.

Better to keep all things as is, but add the HSA/limited health FSA option mid-year. For those that have already elected the unlimited health FSA for the year, I don't think that adding HSA mid-year permits them to end the unlimited health FSA early.

So, do you think if someone wants the unlimited option, which will not be available until March 1, they should be able to elect that, so specified, for the January 1 start date?

If properly announced, do you think there is any way someone could make a general purpose election for January and February, and a limited election for March through December? We could design the election form to offer that option if it would not be a violation.

[J Simmons]

I think you could put in the election form (for use before 1/1/2008) the option of either the unlimited health FSA that would run from 1/1-12/31/2008 or the limited health FSA that would run from 3/1-12/31/2008, either should be elected now, before 1/1/2008.

I think an employee could elect both health FSAs, but the eligibility for HSA contributions would not happen until the first day of the month in 2008 after the unlimited health FSA is exhausted through reimbursement of claims. So an employee might elect a much smaller unlimited health FSA, one he or she thinks would be exhausted in January and February 2008, in addition to the limited health FSA.

As for the health insurance coverage required for HSA contribution eligibility, the employee could elect HSA-compatible health insurance for the whole year. You could have a single election now apply to the whole year that calls for a switch from regular to HSA-compliant health insurance after the unlimited health FSA is exhausted, but administratively that would I think be a nightmare.