U.S. Treasury and Internal Revenue Service have 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 to receive favorable tax treatment.

Generally, under the new rules, all of the following conditions must be satisfied in order to receive the favorable tax treatment:

• By plan year end:
  
  
  • the plan must be amended,
  • the employee must elect the rollover, and
  • the year-end balance must be frozen.

• The funds must be transferred by the employer within two and a half months after the end of the plan year and result in a zero balance in the health FSA or HRA.

Under special transition relief for amounts remaining at the end of 2006, however:

• there is no requirement to freeze the year-end balance in the health FSA or HRA, and
  
  
• the amendment, election, and transfer must be completed by March 15, 2007.

...US Tax News - Latest

Further Information:
Treasury, IRS Issue Guidance Helping Employees Transition To HSAs

Part III - Administrative, Procedural, and Miscellaneous

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