FSA Experience Gains

[Guest RAJ]

I know a company can use experience gains from a Flexible Spending Account to increase the election amount or reduce the premium for participants in the next plan year. What happens if only one person is participating in the new plan year?

Also, what if that person participated last year? I don't believe, per Prop. Treas. Reg. 1.125-2 Q&A7 (B)(7), that any one particpant can get their full amount back from a previous year. Can we give them a portion of their claim experience back and use the rest to offset the cost of the plan?

[Guest MSMA]

Depending on your plan document of course, I think you have a couple of options....being careful not to violate the use-it-or-lose it rule and indirectly, the risk-shifting end of things.

As you know, risk shifting puts the employer "at risk" should an employee claim his entire annual election and then terminate employee. However, the other side of the coin is that, should the participants NOT spend all their election it goes to the employer - presumably to be applied towards their end of next years premium. (But how the money must be applied appears to be a rather grey area at best....the joke is that you could conceivably go out and buy pizza for the administrative offices!)

As for returning the unspent balance to the participant...I think you need to answer the following: Was this plan designed for just one particular position/employee? Or was there an open enrollment which allowed any/all employees to participate? If you anwer yes to the first one, I would not consider paying out the balance at year end - even if taxed first. You would really create a red flag as far as the use-it-or-lose-it rule is concerned)

However, if it just so happened that at the open enrollment only one person decided to participate then I think you could do so - on an after tax basis AND if this is outlined in your plan document.

Well, that's my opinion...we welcome yours! LOL...

[Guest RAJ]

MSMA,

Thanks for your reply. The plan document does outline these options, however this is the first time only one person participated. (The plan was offered to all eligible employees)

As far as the pizza party, we may have to wait until later in the year.(You know, that New Year's resolution thing!