New law allows rollover from FSA to HSA


An employee who enrolled in a health care flexible spending account (FSA) last year has money left in her account that she is about to lose. She has enrolled in your firm’s high deductible health plan (HDHP) this year and now has a health savings account (HSA). She called you and asked whether she can roll her FSA funds over to her HSA. What do you advise?


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).

Amount of rollover. 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.

One rollover per account. 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.

Must remain eligible individual. 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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