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Carol V. Calhoun

Termination of a dependent care FSA

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This one seems like there should be a simple answer, but I'm not finding it. What happens if an employer terminates a dependent care FSA in mid-year? For example, suppose the employee is putting aside $400 a month. The employer terminates the plan June 30, so the employee has put away $2,400. However, the employee has received no reimbursements yet, having expected to use the whole amount only in the last six months of the year. (For example, the employee's wife is home and taking care of the baby for the first six months of the year, but the money was put aside to cover child care for the last six months.)

Can the employer simply cut the program off, with the employee losing the $2,400? May the employer stop future contributions, but still pay out the $2,400 already contributed? Or must the employer continue the plan until the end of the year, so that the employee can contribute the full $4,800?

And what if the employer ceases to exist? In that case, options 2 and 3 are out of the question. Does the employee just lose the money?

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I haven't worked on any FSAs in a long time but I was under the impression they were annual.

That said here is some prior discussion but it 14 years old and I don't know if anything substantial has changed since then

http://benefitslink.com/boards/index.php/topic/15667-termination-of-fsa/

If the company ceases to exist I would assume it might depend on is there are solvent responsible parties or not as participants might be considered creditors with unsecured claims but I am not an attorney.

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They are annual. But my question related to what happens if one is terminated, or if the employer ceases to exist, mid-year.

And the old thread seems to be dealing with health FSAs, which have a bunch of special rules (uniform coverage, COBRA, etc.). Dependent care is not covered by those rules, so the law on them seems rather murkier.

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This is an interesting question.

I would guess without researching that an employer can have more flexibility in terminating a DCAP than it would an ERISA benefit even though there are employee contributions involved but I have no authority for that.

In any event, I would hesitate in having the employer keep the contributions. Other than that, in the absence of guidance, I would try to come up with an equitable solution such as having an extended run-out period, using the amounts to pay for plan administration, or providing for a reversion to participants in line with the IRS's guidance on forfeitures. Perhaps more than one of the above will do the trick.

I would look at state fiduciary law as well as check to see if there are any applicable employment laws that might limit the employer's ability to do any of those things. Of course, the plan document should also be reviewed to see what it provides regarding termination.

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I have the same question. In the old post referred to above:

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).

I have the same question - and the Prop. Reg. referred to above also appears to also allow for return of the excess to employees. Is there any other guidance on this? It can't be an unknown situation, yet the guidance/information seems sketchy. Allowing the employer to keep the unused money just seems wrong!

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On 11/8/2016 at 12:04 PM, Carol V. Calhoun said:

This one seems like there should be a simple answer, but I'm not finding it. What happens if an employer terminates a dependent care FSA in mid-year? For example, suppose the employee is putting aside $400 a month. The employer terminates the plan June 30, so the employee has put away $2,400. However, the employee has received no reimbursements yet, having expected to use the whole amount only in the last six months of the year. (For example, the employee's wife is home and taking care of the baby for the first six months of the year, but the money was put aside to cover child care for the last six months.)

Can the employer simply cut the program off, with the employee losing the $2,400? May the employer stop future contributions, but still pay out the $2,400 already contributed? Or must the employer continue the plan until the end of the year, so that the employee can contribute the full $4,800?

And what if the employer ceases to exist? In that case, options 2 and 3 are out of the question. Does the employee just lose the money?

I am 99% confident that the employee loses the money.  Unlike medical FSA, there are no provisions for continuation after a termination, either an employee termination or plan termination.

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3 hours ago, Belgarath said:

I have the same question. In the old post referred to above:

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).

I have the same question - and the Prop. Reg. referred to above also appears to also allow for return of the excess to employees. Is there any other guidance on this? It can't be an unknown situation, yet the guidance/information seems sketchy. Allowing the employer to keep the unused money just seems wrong!

I am assuming you are referencing a medical FSA.  The medical FSA plan can have either a grace period or rollover provision.  Since the employer is going out of business I assume the plan will be terminated off anniversary, and as such the rollover is not an issue.  Any unused funds are the employers.

By the way, just realized the original post was from 2 years ago.  Sorry.

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You should discuss this with experienced benefits counsel.  It is unlikely that leftover employee contributions can revert to the employer.  

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Hi - I am never sure what you are referencing.  There is nothing that I can find in Pub. 969 that addresses termination of a FSA.

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4 minutes ago, Chaz said:

Hi - I am never sure what you are referencing.  There is nothing that I can find in Pub. 969 that addresses termination of a FSA.

See page 17.

Balance in an FSA
Flexible spending arrangements are generally “use-it-or-lose-it” plans. This means that amounts in the account at the end of the plan year generally can’t be car- ried over to the next year. However, the plan can provide for either a grace period or a carryover.
The plan can provide for a grace period of up to 21 2 months after the end of the plan year. If there is a grace period, any qualified medical expenses incurred in that period can be paid from any amounts left in the account at the end of the previous year. Your employer isn’t permitted to refund any part of the balance to you. See Qualified reservist distribution, earlier.

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Hi - That section does NOT discuss what happens upon a termination of an FSA.  It just states the rule that unused amounts at the end of a year in a participant's FSA are not refundable to that participant.

There are separate rules regarding allocation of forfeitures, which generally cannot revert to the employer, which is the most analogous situation to the termination of an FSA.  In any event, ERISA (and state law, in the case of non-ERISA benefits) will govern how employee contributions are handled in such a case, NOT the Internal Revenue Code.

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On 11/14/2018 at 11:20 AM, Chaz said:

Hi - That section does NOT discuss what happens upon a termination of an FSA.  It just states the rule that unused amounts at the end of a year in a participant's FSA are not refundable to that participant.

There are separate rules regarding allocation of forfeitures, which generally cannot revert to the employer, which is the most analogous situation to the termination of an FSA.  In any event, ERISA (and state law, in the case of non-ERISA benefits) will govern how employee contributions are handled in such a case, NOT the Internal Revenue Code.

I disagree.  If plan is cancelled, the employee is no longer a participant and forfeits the funds.  Dependent care is not an ERISA plan.

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On 11/15/2018 at 4:52 PM, leevena said:

 Dependent care is not an ERISA plan.

You are correct but for non-ERISA plans, applicable state law must be examined.  There is no ERISA preemption in such a case.

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22 hours ago, Chaz said:

You are correct but for non-ERISA plans, applicable state law must be examined.  There is no ERISA preemption in such a case.

Never heard that, nor can I find anything about...but I will defer to you on this.  Thanks for the new info.

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