Health Flexible Spending Account

[alexa]

I'd like to get others' opinions on this issue.

It appears to at least me, myself & I, that Proposed Reg 1.125-2 Q&A 7 allows one to offset health FSA forfeitures by claims of those who underpaid (e.g. a terminated employee who utilized max of $ 2500 and only put in $1,200)

Others' thoughts on this?

Experience with this?

Our plan allows forfeitures to be offset by plan expenses for year in question.

Does anyone see this as violating the exclusive benefit rule?

[papogi]

1.125-2 Q-7 (B)(7) states, "If a health FSA has an experience gain with respect to a year of coverage, the excess of the premiums paid and income of the FSA over the FSA's total claims reimbursements and reasonable administrative costs for the year may be used to..." The ensuing Example then goes on to clarify that this is done in total, for all the accounts of participants. This would mean that your statement is correct that, "It appears to at least me, myself & I, that Proposed Reg 1.125-2 Q&A 7 allows one to offset health FSA forfeitures by claims of those who underpaid (e.g. a terminated employee who utilized max of $ 2500 and only put in $1,200)." Your distinction is already hidden in the math, and is already accounted for. It's just total premiums minus claims and admin costs. That's the experience gain.

Plan docs really should use the phrase experience gain when it's talking about the bottom line in a plan, since it typically refers to an amount increased by income and decreased by admin costs. Forfeitures usually mean total premiums minus total claims, and is the figure before the adjustments.

[Kirk Maldonado]

papogi:

Thanks for clarifying the terminology. That was very helpful for you to define that "experience gain."

[jpod]

Doesn't it go without saying that these plans are almost always unfunded, in which case any forfeitures would inure to the employer's benefit anyway?

Am I missing something here?

[papogi]

FSA forfeitures can be returned to participants, or can be used to increase the amount available for reimbursement in the next plan year. There are many options. Alexa48 was wondering if the raw forfeitures could be used to offset losses before then addressing what to do with the experience gain.

[jpod]

Papogi:

Are you saying that the employer (with an unfunded plan) CANNOT simply pocket the forfeitures?

Again, if the plan is written such that the forfeitures belong to the employer free and clear, I don't understand why the original question needed to be asked.

[papogi]

They can legally pocket the forfeitures. I'm not completely sure of the reasoning behind the original question, but it does not state what the final experience gains are ultimately used for, and doesn't state that experience gains are for the employer or the participants. It's possible that alexa48 was not sure if he/she (I assume she) should only take forfeitures minus costs in order to come up with the amount to return to participants, if that's what they do, or if the amount should be calculated by taking forfeitures minus costs and losses. I don't think the question is in left field.