FSA Experience Gains

[Guest kimvb]

Each year, despite sending multiple letters to particpants begging them to spend down their accounts, we have a large experience gain remaining in our health FSA. We added the grace period and that has helped a little, but not enough. We have little to no administrative cost for the plan, so we can't say that we are keeping it for administrative costs.

What are we required to do with this excess since we cannot use it for any other plan benefit? I have read the EBIA books, which are very detailed about the different ways of re-allocating the money back to participants in the plan. I'm having a bit of a disagreement with our consultant - who is saying that the new proposed regs say that the employer can re-allocate the gains back into the general assets without consideration of ERISA. i.e. he says it is employer money - I say it is employee money.

Help???? Any of your thoughts would be extremely appreciated.

[QDROphile]

Fire the consultant. The new regulations are under the tax code. That has nothing to do with ERISA requirements, which still apply to ERISA plans. Therefore you have differernt standards applicable to health FSAs (ERISA plans) compared to dependent care FSAs (almost never ERISA plans). EBIA is correct. I am serious about firing the consultant. If you have questioned the advice and the consultant has persisted, the consultant is displaying fundamental incompetence, not just ignorance or misunderstanding about new regulations.

[oriecat]

he says it is employer money - I say it is employee money.

My understanding is that it is neither of those, but it is the Plan's money, is that not right?

[Guest Benefit Specialist]

We write a check to the local United Way for our FSA overfunding.

[QDROphile]

Charitable donation does not work for disposition health FSA experience gain if you want to comply with ERISA.

oriecat: ERISA sees the salary reduction as employee money, therfore the money becomes plan assets. The tax code sees salary reduction as salary reduction. The employer holds money that is not paid to employees because of the salary reduction. In a sense, the salary reduction is employer money, which is why the employer can do as it wishes with the money (including charitable donation), subject to the special rules about trying to give it to employees.

[Chaz]

I agree with QDROphile. Note that you also must check state law before giving DCAP forfeitures to charity.

[Guest kimvb]

Thank you all for your input.

QDROphile: DCAP plan gains can be used for charitable contributions because DCAPs are not subject to ERISA, but it is my understanding that you cannot do that with the health FSA unless you have stated so in your plan document, correct? And even if you do that, I don't think this method is advised.

I'm thinking we should divide the gain amongst the current participants in each account and of course, not merge the two. This seems to be the cleanest way to deal with it. I just have this consultant (actually an attorney specializing in benefits - mostly retirement plans though) disagreeing with me. He has called the DOL to get the answer, so I will see how this shakes out.

Our additional problem is that we have a large sum of money in reserve account that has accumulated over a period of many years (prior to my arrival). We're really perplexed with what to do with this money because it was never segregated by each account type and it is also not segregated by year.

Are there any websites or documents that address this topic?

[QDROphile]

The employer cannot donate health FSA experience gains to charity even if the plan document provides that it can be done. Health FSAs are group health plans under ERISA and the employee salary reductions amounts are treated as employee contributions and plan assets. ERISA restricts use of plan assets to plan purposes. Donations to charity are not a legitimate plan purpose under ERISA.

The tax code looks at the arrangements differently. The section 125 regulations to not reflect the ERISA requirements and restrictions.

[jpod]

kimvp: Regarding DCAPs, Chaz raises an interesting point. Inasmuch as DCAPs are not subject to ERISA, a state COULD regulate DCAPs, including the handling of experience gains. For example, a state could say that the employer cannot collect the forfeited amounts and do whatever it wishes to do with it (even though there's nothing in the IRC to prevent that). The state could say that the forfeited amounts must be used to give all employees a benefit of some sort. I've never heard of any state regulation of DCAPs, but maybe Chaz has information to share with us.

[Guest parrot87]

http://www.mhmresources.com/doc/FF/MHMR-FF0408a.pdf

If you look on page 3 of the link, there's a brief concerning what you can do with the FSA money.

As for the nameless account that's accrued money, where did the money come from?

[GBurns]

Personally, I would take some of the MHM suggestions with a few grains of salt. Some I find questionable or in need of much more explanation.

[Guest sniffles]

Since the FICA and Medicare reductions take care of our administrative expenses (from the TPA), we take any left over money in the FSA and subtract any amounts where someone terminated and left a negative balance, any remaining balance left each plan year is divided by the number of participants as of 12/31 of that year who are still employed at the end of April and added to their account for that year.

Example:

Remaining in accounts as of 3/31/08............2000.00

Negative Balances as of 3/31/08..................-200.00

1800.00 Available

No. of EEs enrolled 12/31/07 20 (& still employed on the distribution date)

$90.00 is added to those 20 EE accounts to use in 2008 Plan Year

Over the 5 years we have had this plan we have returned $9,880 back to participants.

[bcspace]

My understanding is that it is neither of those, but it is the Plan's money, is that not right?

We write a check to the local United Way for our FSA overfunding.

Our understanding also is that it's the plan's money. Usually what's left unspent is miniscule because we counsel the employees to make elections based on what they know they will spend. Remind them that they have to spend about 70 to 75 percent to break even with the tax benefit but that you'd rather they put money in their pockets by spending the whole amount.

In some cases, the employer has been able to, after a few years of accumulation, give it back as an employer contribution to all the FSA's in the plan, say $10 to $20 per pay period.