FSA Forfeitures

[Guest Amanda Davis]

Aside from returning the money back to employees, what can an employer do with forfeitures that exceed admin expenses for the year?

I was told by our TPA that you can apply them to future anticipated admin expenses.

The problem is that I just received a call from our general accounting department and they have 4 years of forfeitures that exceed admin expenses. Of course, after 4 years, they want to clear them today.

Any help is appreciated!

[E as in ERISA]

A number of years ago, I had heard of the idea of contributing the forfeitures to charity. If a plan publicizes that any excesses would go to charity, then it might be a good way to encourage employees to contribute in the first place since they might not worry as much about over-contributing. The excess is effectively a deductible charitible contribution for the employee. This might work particularly well if a company has designated charities that it regularly supports (especially ones that the employees are involved with through races, bowl-a-thons, building houses, etc.). I don't see this idea discussed anymore. Was there something that shut it down?

[Ron Snyder]

Forfeitures in 125 plan may:

1. Be used to reduce the employer's next contribution.

2. Be reallocated to participants within the plan on a basis that does not factor in experience.

3. Be used to provide other welfare benefits for employees.

4. Be used to pay administrative expenses of the plan.

They may not be returned back to the employees.

If the employer wishes to give its money to charity, it may do so. However, this would not be possible if the funds are held in trust for benefit of the employees or participants.

The big issue here is: What does the plan document say to do with the forfeitures? That would seem to override all of the other possibilities. And if the document is silent, you have a problem with draftsmanship. This is an essential plan provision.

[Guest Jeff V]

I'm kind of new to FSA Administration, so I'm kind of baffled - everything I've read says that after forfeitures are used to pay admin expense from FSA plans, the remaining amount (aggregate amount or "experience gains") MUST be returned to employees or used to reduce future premiums. Can someone with more experience tell me what I'm missing or misinterpreting?

Thanks.:confused:

[Ron Snyder]

The 1984 Proposed Regulations contain the following paragraph:

"(7) FSA EXPERIENCE GAINS. If a health FSA has an experience gain with respect to a year of coverage, the excess of the premiums paid (e.g., employer contributions, including salary reduction contributions and after-tax employee contributions) and income (if any) of the FSA over the FSA's total claims reimbursements and reasonable administrative costs for the year may be used to reduce required premiums for the following year or may be returned to the premium payers (the participants for premiums paid by salary reduction or employee contributions) as dividends or premium refunds. Such experience gains must be allocated among premium payers on a reasonable and uniform basis. It is permissible to allocate such amounts based on the different coverage levels under the FSA received by the premium payers. However, in no case may the experience gains be allocated among premium payers based (directly or indirectly) on their individual claims experience."