Benefits Buzz

FSAs: Mergers & Acquisitions

Posted on June 19th, 2015

What happens to Health and Dependent Care FSAs when a merger or acquisition occurs?  

 
Of course the Cafeteria Plan regulations do not specify how this should be treated, but the IRS has provided some guidance in the form of Revenue Ruling 2002-32. Fortunately, for employees, the IRS has taken a position that employees should not be punished as a result of a merger or acquisition, and the guidance suggests two possible options that would be acceptable in their eyes. Both options maintain the salary reduction of the employee and preserve the annual election.
 
Option 1: Coverage continues under the seller’s plan but salary reductions occur under the buyer’s plan
 
Under this scenario, there is an assumption that the seller’s employees become employees of the buyer. The buyer must also have an existing FSA or agree to adopt one. Salary reductions occur with the buyer after the merger or acquisition, but the employees continue to seek reimbursement from the seller.  
 
Example: Bill works for Small Bank and elects $1,200 to his FSA at the start of the plan year on January 1st. His company is purchased by Bigger Bank on July 1st. Up to this point, Bill has had $600 salary reduced through Small Bank and has not submitted any reimbursement requests. After the purchase date, Bill will have the $600 in remaining salary reductions occur through his new employer Bigger Bank, but he will continue to request reimbursements up to $1,200 from his old employer Small Bank.
 
Option 2: Coverage is transferred to the buyer’s plan  
 
Under this scenario, there are the same assumptions as in the previous option. However, under this option the FSA is transferred from the seller to the buyer, including all information regarding earlier reimbursements. Salary reductions and reimbursement requests occur through the buyer on a date specified and agreed upon by the two companies.
 
Example: Kathy works for Little Company and elects $2,400 to her FSA at the start of the plan year on January 1st.  Her company is purchased by Huge Company on April 1st. Up to this point, Kathy has had $600 salary reduced through Little Company and has been reimbursed for $400 in medical expenses. After the purchase date, Kathy will have the $1,800 in remaining salary reductions occur through her new employer Huge Company, and she will also request reimbursements of up to $2,000 (remaining balance) through Huge Company.  
 
Qualifying Event?
Mergers and acquisitions do not create a qualifying event to make an election change. Unless other circumstances warrant, the annual election will remain the same under either option. It’s just a matter of where the salary reduction is occurring and which employer plan is providing reimbursement.  
 
 
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The materials contained within this communication are provided for informational purposes only and do not constitute legal or tax advice.

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