The Internal Revenue Service has issued guidance regarding rollovers from Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (RHAs) to Health Savings Accounts (HSAs). The guidance is necessary because Health Savings Accounts are typically not available to individuals who are covered by standard FSAs and HRAs. The Tax Relief and Health Care Act of 2006 allowed rollovers from FSAs and HRAs into Health Savings Accounts. The purpose of the guidance is to allow the establishment of an HSA and the rollover of the qualified distributions for 2007 when the employee could potentially be covered by both types of plans.

The new rules provide for certain amounts in the FSA or the HRA to be rolled into the HSA. Generally, under the new rules, all of the following conditions must be satisfied in order to achieve the favorable tax treatment of the rollover:

A.        By plan year-end, the plan must have been amended, though the employee must have elected the rollover, and the year-end balance must have been frozen.

B.         The funds must have been transferred by the employer within 2-1/2 months after the end of the plan year resulting in a “zero” balance in the FSA or the HRA.

Under the special transition relief provided in Notice 2007 – 22, available at  ( ),  the amounts remaining at the end of the year for 2006 can be rolled over without the freezing of the year-end balance in either the FSA or the HRA and the amendment, election and transfer may be completed on or before March 15, 2007.