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Termination of FSA


Guest BJW
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Our client (the employer) has a flexible spending account which they would like to terminate as soon as possible. I have two questions.

Question (1) Can the annual allotment, to the extent not already paid out, be cut back to the pro-rata portion of the year? For example, an employee elected 2,000 for the year, the arrangement terminates June 30 - does the employee now only have 1,000 available for reimbursement?

Question (2) Does the termination of the arrangement cut off the ability of the participant to incur expenses for reimbursement after the cutoff date? For example, the arrangement is shut down June 30, so can the employee get her full 2,000 of expenses incurred before June 30 reimbursed but expenses that she incurs in July are not reimburseable? Can the employee get her full 2,000 reimbursed provided she has incurred the expenses before June 30 even though she has not and will not pay the remainder of her annual contributions toward the arrangement?

Thank you for reviewing my question. Any help would be great.

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You can't cut off the available funds for reimbursement. The uniform reimbursement requirement means that the entire annual election must be available at any point in the plan year while the employee is participating. This sets up the employer for losses. Why do they have to stop the FSA immediately? Why don't they just finish off the plan year? It's of almost no cost to the employer.

If they insist on termination, then I guess that's what you'll have to do. You do not have to honor any claims with dates of service past the date of the plan's termination. Flex COBRA should be offered to individuals who have not been reimbursed an amount equal to or greater than what they have actually contributed. Then again, if the entire plan is terminating, there is nothing subject to continuation rights. This will cause some pretty bad employee relations with the participants who were expecting more bills in the latter part of the plan year. I strongly recommend finishing out the year.

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Thank you for responding. To my knowledge, they want to terminate the entire plan asap. I have not been provided with an explaination why they wish to do that mid year.

Do you have any rev. procs or rev rulings that I may cite to the client. Do you think it is safe to give the employees notice of the termination and allow them a number of days to submit their claims for unreimbursed services as of that date?

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I can cite PTR 1.125-2 Q-7(B)(2) to show that the entire annual amount must be made available. I see nothing in the regs which addresses mid-year plan termination. An employer has every right to cease offering a benefit, so I think that's implied and understood in the regs. Once the plan terminates, the industry standard is to have a 90 day run-off period which gives employees time to compile receipts for reimbursement. There is no IRS rule on this, but 90 days is most common. Concerning the warning of plan termination, there might be a certain number of days required under ERISA (30 days??), since this is a welfare plan, but I don't know that for sure. Hopefully someone else can jump in here on that point...

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I agree w/ Papogi. Just wanted to add 1 thought. If the employer is going to terminate the plan, I would think that the employees should be given adequate notice just out of common decency. For example, if I were an employee there and was going to get my eyeglasses on July 15, and found out that the plan was terminating on June 30, that would give me the opportunity to change my appointment and still use the money, rather than lose it. Sometimes, even if it's not in the regs, there are still "proper" ways to conduct business.

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  • 6 years later...

I am faced with this same situation. Employer is going out of business and is terminating all health plans including the FSA. My question is what happens to the employee contributions that haven't been used to reimburse expenses. They are plan assets and presumably they cannot revert back to the employer, correct? Anyone have any thoughts?

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  • 4 weeks later...
I am faced with this same situation. Employer is going out of business and is terminating all health plans including the FSA. My question is what happens to the employee contributions that haven't been used to reimburse expenses. They are plan assets and presumably they cannot revert back to the employer, correct? Anyone have any thoughts?

Amounts that the ER has not had to pay to EEs as part of payroll due to pay reductions elected to cover the cost of cafeteria benefits, but then not needed to pay those expenses are cafeteria plan 'experience gains'. The ER may retain them. Prop Treas Reg § 1.125-5(o).

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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