Setting a minimum rollover amount

[dmwe]

Our current document provider doesn't have language/options that allows a Plan sponsor to set a minimum that they'll allow an employee to rollover from one year to the next in their FSA, but we'd like to add an appendix/amendment to limit rollovers to $25 and anything under $25 will be forfeited. Do you all know if anything in the Regs that would prohibit that type of language? Thanks all.

[Brian Gilmore]

We do have guidance in the IRS ACA "Potluck Guidance" in Notice 2015-87 and the IRS CAA FSA Relief guidance in Notice 2021-15 stating that carryovers can be conditioned on a minimum election amount for the subsequent plan year.  But I'm not aware of guidance addressing a minimum threshold of unused funds to take advantage of the carryover.  So I would proceed with caution there.

 

[acm_acm]

Even if one can do something, one really ought to ask whether one *should* do that something. 

I know it's just $25, but in the current tight labor market, I find it head-scratching that someone would want to be thinking up ways to give employees a reason to be upset. 

Just sayin'.

[dmwe]

The situation comes up every so often. Someone has basically decided not to save in an FSA anymore but has a small balance at the end of the year. The Plan has a Rollover option so this small account just sits out there rolling from year to year. The company has to keep paying maintenance fees and would like us to be able to forfeit some of these small accounts to get them closed out.

[Brian Gilmore]

The easy way to handle that would be by requiring a minimum election for the subsequent year. 

That was addressed initially in the IRS ACA "Potluck Guidance" in Notice 2015-87, and then confirmed and reiterated (and expanded to the dependent care FSA) in the IRS CAA FSA Relief guidance in Notice 2021-15.  

The Potluck Guidance provided the plan may restrict carryover funds to only those employees who elect to contribute for the subsequent year.  The plan terms may therefore provide that employees must make a minimum election of some amount (e.g., $25) to the health FSA for the subsequent plan year in order to participate and have access to the carryover from the prior year.

So employees who do not make the minimum election to participate in the FSA for the subsequent year will forfeit any unused amount at the end of the plan year and any associated run-out period.  In other words, there will not be any carryover amount available in the subsequent plan year.

More details here: https://www.theabdteam.com/blog/health-fsa-500-carryover-conditioned-on-new-plan-year-election-2/

The CAA FSA Relief notice added the following in footnote 6: 

IRS Notice 2021-15: 

https://www.irs.gov/pub/irs-drop/n-21-15.pdf

An employer adopting the § 214 carryover may, in its discretion, require employees to enroll in the health FSA or dependent care assistance program with a minimum election amount to have access to the unused amounts from the prior plan year. See Q&A 24 of Notice 2015-87, 2015-52 IRB 889.

Here's the original Potluck Guidance from 2015:

IRS Notice 2015-87:

https://www.irs.gov/pub/irs-drop/n-15-87.pdf

Question 24: May a health FSA condition the ability to carry over unused amounts on participation in the health FSA in the next year?

Answer 24: Yes. A health FSA may limit the availability of the carryover of unused amounts (subject to the $500 limit) to individuals who have elected to participate in the health FSA in the next year, even if the ability to participate in that next year requires a minimum salary reduction election to the health FSA for that next year.

[Chaz]

19 hours ago, dmwe said:

 The company has to keep paying maintenance fees and would like us to be able to forfeit some of these small accounts to get them closed out.

Why would the company be paying "maintenance fees"?  The amounts should be held in the sponsor's general assets.  If anything, I think the company should be making a nominal amount of interest from the rollover.

[dmwe]

The employer pays a maintenance fee to the TPA for administration of FSA activity.