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November 22, 2005 at 07:00 PM
The Internal Revenue Service says some employers may face a collision between health savings account rules and flexible spending arrangement rules in early 2006.[@@]
Shoshanna Tanner, an IRS tax-exempt entities official, describes the conflict and offers transition relief in IRS Notice 2005-86.
The IRS recently issued a notice that lets sponsors of FSA plans bend the notorious, much-hated “use it or lose it” rule for FSA assets, by creating a “grace period.”
In practice, the new grace period rule lets an employer with an FSA year that started Jan. 1 give plan members until March 15, 2006, to spend all 2005 FSA contributions.
Meanwhile, Tanner writes, many employers also want to offer health savings account programs starting Jan. 1, 2006.
Holders of HSAs must have special high-deductible health insurance plans. They can have “limited purpose FSAs” that cover only expenses for preventive care, dental care or vision care. HSA holders also can have “post-deductible health FSAs” that start covering eligible medical expenses only after the HSA holders have met their annual health insurance deductibles, Tanner writes.
Under the current rules, employees who now have general purpose health FSAs, with a grace period running from Jan. 1, 2006, to March 15, 2006, will not be eligible to contribute to HSAs until April 1, 2006, Tanner writes.
