IRS Sets Rules For FSA-To-HSA Rollovers

The Internal Revenue Service has come up with procedures for employers that want to help employees shift unused flexible spending account assets into health savings accounts.

The procedures, spelled out in IRS Notice 2007-22, implement Section 302 of the Health Opportunity Patient Empowerment Act of 2006, which creates an unusual opportunity for FSA holders to do something other than lose unused account funds at the end of the year.

The law permits some FSA holders to transfer unused FSA assets into HSAs one time before Jan. 1, 2012.

The same law also permits holders of health reimbursement arrangements to transfer HRA assets into HSAs by 2012.

FSA and HRA rules give taxpayers great flexibility in spending account funds on qualified health care expenses. HSA rules, in contrast, require taxpayers to own HSA-compatible high-deductible health coverage.

FSA holders might like the idea of putting FSA assets into HSAs simply to avoid losing assets to the notorious FSA “use it or lose it” rule, officials say.

HRA holders do not face a use-it-or-lose-it rule, but they may want to convert HRA assets into HSA assets because HSA assets are portable and HRA assets are not. In addition, HSA holders can invest HSA assets in a wide array of investments. HRA holders cannot earn interest or dividends on HRA assets, according to program rules.

IRS officials write in the new notice that employers and employees must normally meet the following conditions to receive favorable tax treatment:

1. By the end of the plan year:

- The plan must be amended.

- The employee must elect the rollover.

- The year-end balance must be frozen.