Acquisition of FSA Participants

[Guest sheilaparker]

We have an employer who entered into an agreement with an unrelated company to transfer employees from a specific department to the unrelated company. The new (unrelated) company told them prior to the agreement that it would be acceptable to transfer FSA balances on those affected participants immediately to the new company's cafeteria plan. (The "old" employer's plan year is calendar, so the participants were halfway through the plan year at the time of the transition on July 1.)

The new company says they transfer balances mid-year when they buy employees like this "all the time". To us, it seems those employees would be treated as any other terminated participant and only services rendered through their date of termination would be eligible for reimbursement. The employer did not intend to cause a hardship to those participants. The participants were, in fact, told by the employer that the balances would transfer and there would be no adverse consequences to them concerning their cafeteria accounts due to this transition to the new company.

Does anyone know of a way to justify the balance transfers?

Thanks,

Sheila P.

[mbozek]

See Rev. rul 2002-32.

[GBurns]

sheilaparker,

Please understand that I am not "picking" on you with this post, I am trying to understand why so many service providers, TPAs in particular, have the approach that you have.

What legal support did the employer give for their position?

What research was done before expressing or even forming an opinion?

Does it affect the TPA etc if they carry out the wishes of their client and it turns out that the client was wrong?

Would penalties be to the employer or to the TPA etc?

An employer employs a TPA or any service provider to carry out certain functions that the employer either does not have the staff with which to do the thing, or which the employer wishes to distance themself from.

The employer in your post wishes to something and employs a TPA etc to do it. The employer has his reasons. Instead of performing the requested service, the TPA etc instead "tells" the employer that it cannot or should not be done because the TPA etc does not believe it should or could be done the way the employer wants it. The TPA etc does not provide any legal support for their position yet takes a stand and expresses or forms an opinion.

It turns out, as is very usual, the employer is correct and the law etc seems to be on his side. There seems to be nothing to support the opinion expressed by the TPA or service provider.

To you specifically, I ask, What was your basis for having the opinion that "To us, it seems those employees would be treated as any other terminated participant and only services rendered through their date of termination would be eligible for reimbursement"?? My first thought in this situation iwas to wonder if this should be regarded as similar to a "successor employer", a purchase or asset purchase, or a "same desk" situation.

[Guest sheilaparker]

I appreciate the response below, however, our client is asking us if this is permissible, not merely requesting the transaction. (They already know we will do what they request.) I'm not sure what is behind the (almost) hostility toward TPAs who have this apparent "approach" we've unwittingly exhibited. Anyone who's spent any length of time in a TPA is well aware that the responsibility falls squarely on the shoulders of the plan sponsor. I can't speak for others, but I do believe that we have an obligation to steer our clients in the proper direction. It's human nature to want things done quickly with the least amount of effort without researching the consequences. Employers get in trouble routinely in these matters without really meaning to. I believe part of my job is to inform and then let them decide, but that's just me.

At any rate, I had already asked if the new employer intended to name our client as a predecessor employer and was told 'no'. I had not thought of the same desk rule and will now review that along with Rev. Rul 2002-32.

Thank you for your help (I think).