Qualified HSA Rollovers
The first piece of guidance relating to qualified distributions from a flexible medical spending account (FSA) or a health reimbursement arrangement (HRA) to a health savings account (HSA) has been issued, in the Form of IRS Notice 2007-22. The Tax Relief and Health Care Act of 2006 (TRHCA), signed into law in December, 2006, authorized a one-time rollover from an FSA or an HRA, to an HSA.
Only one rollover can occur per plan, and the rollover must occur sometime between December 20, 2006 and January 1, 2012. The rollover can be no more than the lesser of:
- The FSA or HRA account balance as of September 21, 2006; or
- The day of the distribution, determined on a cash basis; thus, disregarding claims not yet submitted or reimbursed.
There are eight steps that must be taken to accomplish the rollover, with transitional relief, for plans ending prior to the issuance of the relief. To be a qualified HSA distribution from an FSA or HRA:
- The employer’s FSA or HRA plan must be amended prior to the end of the plan year in which the rollover will take place to allow a qualified HSA distribution;
- No previous rollover can have been made from the FSA or HRA;
- The employee taking the rollover must have high deductible health plan (HDHP) coverage as of the first of the month in which the qualified HSA distribution is made, and is otherwise an eligible individual;
- The employee must elect the qualified HSA distribution as of the last day of the FSA or HRA plan year;
- The FSA or HRA must make no further reimbursement to the employee after the close of the plan year;
- The employer must make the qualified HSA distribution directly to the HSA trustee, after the date the employee becomes HSA-eligible;
- The qualified HSA distribution cannot exceed the lesser of the account balance in the FSA or HRA as of a) September 21, 2006; or, b) the date of the distribution; and,
- Following the date of the distribution, there must be a zero balance in the FSA or HRA, and the employee is no longer eligible to participate in HDHP-incompatible coverage. The employee could continue to participate in HDHP-compatible coverage, such as a limited-scope FSA, or an FSA or HRA that reimburses only after a high deductible has been satisfied, or a retiree HRA, for example.
Because TRHCA was passed late in 2006, and since plans had little time and no guidance on which to rely, this Notice includes a transition period; during which time, account balances in FSAs or HRAs, as of the end of 2006, can be transferred as qualified HSA distributions, if all of the following are accomplished by March 15, 2007:
- The affected plan is amended;
- The individual makes the election; and,
- The distribution is made to the HSA trustee.
This guidance does not address mid-year plan changes, or whether such events could give rise to a qualified HSA distribution. This guidance only contemplates plan year-end distributions.
Additional guidance will likely be forthcoming. In the meantime, employers wanting to offer qualified HSA distributions for the 2006 plan year will have to act quickly.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.