Affiliated Company/Same Control Group for an acquired company

[MD-Benefits Guy]

The company I was working for was acquired back in March.  The health and welfare benefit plan runs on a calendar year.

Acquiring company is moving all employees to the new company's benefit plan effective 7/1 (also calendar year).  We are shutting down all existing benefit plans on 6/30.

For HCFSA contribution limits, would we treat these 2 plans as affiliated/same control group plans...meaning that between the 2 plans, participants could not elect more than the annual 2024 annual limit of $3200?  How do we treat employees who may have overspent their accounts?  (Employee elected $3200, only contributed $1600, but already received $3200 in reimbursements?) Can they make an election with the acquiring company, if so, how much? 

TIA

[Brian Gilmore]

My understanding here is that the seller's health FSA did not terminate prior to closing.  So there was an overlap period from March-June in which the entities were part of the same controlled group.

The best way to handle would have been to continue health FSA coverage through the end of the plan year either through the seller's FSA or by rolling elections/balances to the buyer's health FSA.  That approach is outlined by the IRS in Revenue Ruling 2002-32.  

Here's an overview of the rules that apply in that approach: 

• https://www.newfront.com/blog/merger-acquisition-rules-health-fsa-2
• 2024 Newfront M&A for H&W Employee Benefits Guide

However, it does not appear that's going to be the approach here.  Instead, the seller health FSA will simply terminate mid-year.  

In that case, because there was a period in which the seller health FSA was sponsored by an entity in the buyer's controlled group, the salary reduction contribution limit is going to be applied across both plans combined for the plan year. 

I think the only viable way to interpret that restriction is that the employee's election with the buyer health FSA will have to be reduced by the amount of the employee's election under the seller's health FSA.  So, for example, an employee who elected $1,000 with the seller's health FSA will be restricted to a contribution limit of $2,200 under the buyer's health FSA.  

The other options would be to base the reduction on YTD contributions (doesn't make sense to me because it's not tied to actual benefit received), or YTD utilization (seems overly complex and not closely related to the salary reduction contribution limit that's governing here).

This approach is consistent with the statutory change to §125 made by the ACA which says that an employee "may not elect" to have contributions in excess of the limit.

 

Here's the relevant cites:

IRC §125(i)(1):

(i) Limitation on health flexible spending arrangements.

(1) In general.

For purposes of this section , if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement.

 

IRS Notice 2012-40:

https://www.irs.gov/irb/2012-26_IRB#NOT-2012-40

All employers that are treated as a single employer under § 414(b), (c), or (m), relating to controlled groups and affiliated service groups, are treated as a single employer for purposes of the $2,500 limit. If an employee participates in multiple cafeteria plans offering health FSAs maintained by members of a controlled group or affiliated service group, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,500 (as indexed for inflation). Section 125(g)(4). However, an employee employed by two or more employers that are not members of the same controlled group may elect up to $2,500 (as indexed for inflation) under each employer’s health FSA.

[MD-Benefits Guy]

Brian, once again, thank you for the informative response.  Your contributions to this forum have been very helpful to those of trying to navigate the complex world of benefit regulations.

It seems like there might be some slightly different instructions between IRC §125 and Notice 2012-40.

-  IRC §125(i)(1) says an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500

-  Notice 2012-40 says the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,500 

Under most circumstances, there would be no difference between elected and contributed amounts...but in this particular situation, there is.

Under 2012-40, could it not be argued that the amount that employee could elect under the new employer plan would be Annual Limit - Contributions made under previous HCFSA?

 

 

[Brian Gilmore]

Yeah I think that's a valid argument, just not the best argument.  I think it's more likely the IRS wants to track the statute on this one--despite the inartful articulation in that notice.  But it's definitely a gray area.

The approach you're suggesting could theoretically result health FSA benefits for the plan year far in excess of $3,200.  In some ways that could make sense because, for example employer contributions generally don't count toward the salary reduction limit.  So it wouldn't be the only scenario where that could occur.  Still seems like a bit of a stretch here, though.

If I were advising a client, I'd recommend they stick to the amount elected as the basis for the reduction.