The Internal Revenue Service and U.S. Treasury recently issued guidance regarding how employers can rollover their health Flexible Spending Arrangements (health FSAs) and Health Reimbursement Arrangements (HRAs) to Health Savings Accounts (HSAs) for their employees.

The guidance provides a special transition rule for transfers for 2006. Under the transition rule, the amendment, election and transfer must take place by March 15, 2007.

The Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, enacted Dec. 20, 2006, allowed employers to amend their health FSAs or HRAs, with balances on Sept. 21, 2006, for a one-time rollover to an HSAs by 2012. The guidance clarifies the requirements for making these rollovers, which must be made directly to the custodian or trustee of the HSA.

Under the guidance, a health FSA with a grace period or HRA must be amended and a rollover selected by an employee before year end. The balance amount must be transferred to the HSA by March 15 of the following year. The ability to make these transfers will facilitate the transition to an HSA-eligible health plan when employees are covered by an HRA or FSA.