With higher taxes coming our way, we have to applaud any health care fund that shields an employee from paying more taxes than necessary, whether it's a Flexible Spending Account (FSA), Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA). Many employers were quick to jump on the HRA bandwagon when the private letter ruling allowed for their adoption, but HSAs are emerging as the clear winner with an adoption rate double that of HRA's. In fact, HSAs have been growing at a rate that has exceeded that of HMO's when they were first introduced. This SHRM article confirms that in 2011, 41% of companies adopted an HSA (compared to 20% HRA) with another 12 percent of companies expected to do so in 2012.
So if you jumped into the HRA game and are considering a move to a more tax-efficient account that will allow your employee skin in the game and greater tax savings ... you need to know that IRS will allow a rollover conversion, but the one-time rollover opportunity ends in 2011.
In working with our clients through these conversions, we have compiled the following IRS service rules that govern the rollover:
- Employee can transfer the balance of the HRA to an HSA. The transfer must be made by December 31, 2011 and can only be done once;
- The qualified HSA distribution from the HRA cannot exceed the lesser of the balance of the HRA on September 21, 2006 or the date of the distribution;
- The employer must amend HRA plan document by December 31, 2011 to allow the qualified HSA distribution;
- There should be no prior qualified HSA distribution from the HRA on behalf of any employee with respect to that particular HRA;
- The employee must have HDHP coverage as of January 1, 2012;
- The employee must elect by December 31, 2011 to have the employer make a qualified HSA distribution from the HRA to the employee's HSA;
- The HRA may make no reimbursements to the employee after December 31, 2011 (i.e. the plan year-end balance is "frozen"); and
- The employer must make the qualified HSA transfer directly to the trustee or custodian of the employee's HSA by March 15, 2012; and either a) after the qualified HSA distribution there is a $0 balance in the HRA, and the employee is no longer a participant in any non-HSA compatible health plan; or b) effective on or before the date of the qualified HSA distribution, the general purpose HRA is converted into an HSA-compatible HRA for all participants.
For more information concerning one-time rollover opportunities, you may elect to read this Lockton Benefit Group Compliance Alert.