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Small Business Digest


March 15th Deadline Looming For 2006 Leftover Monies Transfer From FSAs

Just a few more days are left to make contributions to HSA custodial accounts from 2006 FSA leftover monies.

The Internal Revenue Service and U.S. Treasury recently issued guidance regarding how employers can rollover their health Flexible Spending Arrangements (health FSAs) and Health Reimbursement Arrangements (HRAs) to Health Savings Accounts (HSAs) for their employees.

The guidance provides a special transition rule for transfers for 2006. Under the transition rule, the amendment, election and transfer must take place by March 15, 2007.

The Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, enacted Dec. 20, 2006, allowed employers to amend their health FSAs or HRAs, with balances on Sept. 21, 2006, for a one-time rollover to an HSA by 2012. The guidance clarifies the requirements for making these rollovers, which must be made directly to the custodian or trustee of the HSA.

Under the guidance, a health FSA with a grace period or HRA must be amended and a rollover selected by an employee before year end. The balance amount must be transferred to the HSA by March 15 of the following year. The ability to make these transfers will facilitate the transition to an HSA-eligible health plan when employees are covered by an HRA or FSA.

Certain amounts in a health FSA (or a health reimbursement arrangement (HRA) can be distributed from the health FSA or HRA and contributed through a direct transfer to an HSA ("qualified HSA distribution") without violating the otherwise applicable requirements for such arrangements. This rule is pursuant to a new law, the Tax Relief and Health Care Act of 2006 (P.L. 109-432).

The amount that can be distributed from a health FSA or HRA and contributed to an HSA may not exceed the lesser of the balance in the health FSA or HRA as of September 21, 2006, or the balance as of the date of the distribution.

Only one qualified HSA distribution with respect to each health FSA or HRA of an individual is allowed. Contributions must be made directly to the HSA before January 1, 2012.

If an employer makes available to any employee the ability to make contributions to an HSA from distributions from a health FSA or HRA, all employees who are covered under an HDHP of the employer must be allowed to make such distributions and contributions.

If an individual who makes a qualified HSA distribution from an FSA or HRA does not remain an eligible individual (i.e., enrolled in an HDHP) during a testing period, the amount of the contribution is includible in the individual's gross income. The testing period is the period beginning with the month in which the qualified HSA distribution is contributed to the HSA and ending on the last day of the 12th month following such month.

A 10-percent additional tax also applies to the amount included. An exception applies if the employee ceases to be an eligible individual by reason of death or disability.

Source: IRS Code Sec. 106(e), as added by the Tax Relief and Health Care Act of 2006 (P.L. 109-432).

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