FSA and HRA Rollovers to an HSA

This rule allows employers to permit a one time tax-free rollover of unused Health FSA and/or HRA balances to an HSA, provided certain conditions are satisfied.

• An employer allowing this rollover will likely need to amend their plan document and summary plan description.
• If an employer offers this option, all employees covered under the employer's HDHP must be given the opportunity to rollover funds to the HSA.
• The rollover must be the lesser of the amount in the FSA/HRA as of September 21, 2006 or the amount in the account at the time of distribution. Only employees who had the HRA and/or Health FSA on September 21, 2006 and through the time of distribution may make rollovers to their HSA. This rule does not apply to FSA/HRA accounts established after this date.
• The rollover must occur before January 1, 2012.
• The rollover must be sent directly to the HSA custodian by the employer.
• The individual must be covered by an HDHP for 12 months after the transfer. If not, the funds transferred will be treated as taxable income and subject to a 10% excise tax.
• The rollover to the HSA is not subject to the maximum annual contribution limits. This means rollovers from the FSA/HRA to the HSA will not reduce the maximum annual contribution to the HSA during the calendar year in which the rollover occurs.

Examples:

John has a Health Care FSA with a balance of $2000 on September 21, 2006. His employer’s renewal date is January 1, 2007. John’s Health FSA balance is $1500 as of December 31, 2007. The employer may only transfer $1500 (the lesser of the account balance on September 21, 2006 and the current balance) on the last day of the plan year.

John’s coworker, Mary, also enrolls in a Health Care FSA. However, she joined the company on January 15, 2007. Since she did not have an FSA on September 21, 2006, she is ineligible to have funds transferred to her HSA.

ACME offered an HRA to part-time and full-time employees in 2006. In 2007, ACME decides to offer an HDHP with an HSA and decides to allow employees to rollover unused HRA funds. ACME must allow all employees (full-time and part-time) to rollover the funds. ACME cannot only allow one class of employees to rollover funds.

What are the benefits of this change?

This rule eases the transition to HSA products for Humana customers that offer HRAs to their employees. In the case of the FSA rollover, it allows employees to avoid the year end “use it or lose it” rule for the year of the rollover.

If you have questions, employers should contact their Humana Sales Representative.
Brokers should call Humana’s Spending Account Hotline at 800.281.6778.